As the COVID-19 pandemic continues to evolve and cause economic disruption UK-listed companies are taking action to support their balance sheets and provide financial flexibility. In particular, many companies have adjusted their approach to capital allocations with some also reviewing its approach to executive and employee remuneration. Boards have difficult decisions to make and getting the approach to capital maintenance and the treatment of employees, customers and executive remuneration wrong could have long-lasting economic and reputational impacts.[1]
CAPITAL MAINTENANCE
Capital Allocation
An increasing number of UK-listed companies have sought to preserve cash by cancelling and/or suspending further dividends and share buybacks as a result of the COVID-19 pandemic. The suspension of dividends will be a real worry for income-dependent investors such as pension funds. At the same time, shareholders will recognise the need for companies to retain cash and build liquidity. A notably smaller number of UK companies are suspending share buybacks than dividends.
We expect further companies to announce changes to capital allocation strategies in the coming months, particularly as societal pressure grows and questions will be asked over the decision to return capital to shareholders.
UK-listed Capital Maintenance Response
Companies that had already issued its notice of meeting before deciding to cancel its final dividend have withdrawn the resolution to approve the dividend from the AGM. Quartix Holdings took an alternative approach by recommending shareholders vote down the dividend resolution instead of withdrawing the resolution. The resolution was defeated at the AGM with 72.9 per cent of shareholders voting in line with the board’s recommendation to reject the dividend.
Airline Capital
The airline sector has been one of the hardest-hit sectors and as companies look to the Government for assistance questions may be asked over capital decisions.
Ryanair announced on 16 March that it will be grounding surplus aircraft, deferring all capex and share buybacks, freezing recruitment and discretionary spending, implementing a series of voluntary leave options, temporarily suspending employment contract, and reducing working hours and payments. Ryanair spent approximately €26.0 million on the purchase of ordinary shares and around $25.7million on the purchase of ordinary shares underlying American depositary shares in the month of March alone. Stakeholders may question why such funds were spent on buybacks given the immediate difficulties the group faced.
EasyJet has faced criticism after it paid a £174million dividend to shareholders despite appealing for Government assistance. EasyJet has argued it was legally obliged to pay the dividend as it already held its AGM at which shareholders voted through the dividend. Further, easyJet founder Stelios Haji-loannou, who holds 34 per cent of easyJet and received a dividend of £60million, has threatened to launch a campaign to vote off non-executive directors if easyJet did not cancel orders from the European aerospace manufacturer to cut costs.
Capital Authorities
One item for companies to consider when deciding how to approach its AGM are annual authorities, including the authority to issue shares and for financial institutions, the authority to issue convertible instruments in relation to regulatory capital maintenance. Generally, authorities will expire at the earlier of the date of the following AGM and 15 months after the AGM at which they are granted. Depending on how the AGM season plays out companies may see their existing authorities expire.
Additionally, companies required to approve a new remuneration policy at their 2020 AGM have until the end of their current financial year to approve the new policy.
Regulatory Pressure
The Financial Reporting Council (FRC) has called on companies that have proposed but not yet made a dividend, to not only consider the position of the company when the dividend was proposed but also when it is made. Where the company is no longer able to pay a dividend, the FRC recommends directors to halt any dividend and communicate as appropriate to the market.
The Prudential Regulatory Authority (PRA) has requested the UK’s seven largest banks (HSBC, Nationwide, Santander, Standard Chartered, Barclays, RBS and Lloyds) to suspend dividends and buybacks until the end of 2020, and to cancel payments of any outstanding 2019 dividends. The PRA has also asked UK insurers to pay close attention to the need to protect policyholders and maintain safety and soundness when making decisions on distributions to shareholders.
In addition, the European Central Bank asked eurozone banks to freeze dividends until October 2020 and not to buy-back shares in order to preserve liquidity that can be used to help households and companies through the coronavirus crisis. The European Banking Federation has also asked listed banks to not accrue dividends or to undertake share buybacks to maintain capital preservation.
EXECUTIVE REMUNERATION AND EMPLOYEES
A smaller number of companies have announced cuts to executive remuneration, perhaps less than expected. Excessive executive pay is a sensitive issue and it carries extra reputational risks as health systems are buckling and people are losing their jobs. Companies have an opportunity to show restraint and lead by example.
Shareholder Voting
When it comes to voting at this year, while shareholders may want to see remuneration committees using discretion, they will recognise that pay decisions for the year under review have already been made. A company’s approach to executive pay could come under more scrutiny next year.
One key issue for shareholders to consider this year is the fluctuations in share price and the grant of long-term incentive awards. Many companies have suffered a fall in share price and if share award grants are maintained at the same multiple of salary, should the share price recover executives could receive windfall gains on vesting. Shareholders will expect remuneration committees to pay close attention to share awards and scale back the size of grants when appropriate.
Remuneration Reductions
Currently, the most common response taken by companies is to review employee remuneration provisions. A growing number of FTSE 350-listed companies have announced an intention to maintain employment for workers for as long as possible and to utilise the UK Government’s Job Retention Scheme to fund workers who are unable to work in the lockdown period, under the scheme 80 per cent of the wage costs of employees who are unable to fulfil their role due to COVID-19 will be borne by the UK Government.
The retention of staff and associated skills will be crucial to a company’s ability to weather the current storm and rebuild. The failure to retain employees and treat them fairly could have long-lasting effects, particularly as the UK corporate governance regime shifts to a more stakeholder-oriented model and ESG conditions may be attached to Government bailouts. For example, thinktank High Pay Centre has argued that Government bailouts of large businesses affected by the coronavirus must include social and environmental conditions, including a cap on CEO pay at 10 times the median pay of employees and employee board representation.
UK-listed Executive and Employee Response
FTSE 350 companies that have reviewed executive remuneration have mainly focused on fixed pay adjustments, through a temporary reduction in executive and non-executive salary and fees or the cancellation/deferral of increases. This approach has been taken by Capita, DFS Furniture, Dunelm, James Fisher, John Menzies, MITIE, St Modwen Properties and WPP. Where a timeframe has been given, most companies have adopted a three-month reduction.
International Consolidated Airlines Group has announced British Airlines head Willie Walsh has delayed his retirement and volunteered to reduce his salary by 20 per cent for the remainder of his contract. At Lookers, all members of the board and various members of senior management have agreed to temporary amendments to their contractual remuneration. Ryanair has announced CEO Michael O’Leary and employees would both have their pay cut by 50 per cent for the months of April and May.
Other companies have reviewed the approach to both fixed and variable pay. At Rentokil Initial, in addition to fixed pay cuts, bonus schemes have been cancelled and the 2020 LTIP grant postponed. RPS Group has deferred salary increases and 2019 bonus payments. Hammerson has cancelled executive and non-executive salary/fee increases and reduced the initial grants under a newly proposed restricted share plan from 100 per cent to 75 per cent of salary. Finally, Taylor Wimpey has cancelled annual salary increases, cut executive salaries and pensions and non-executive fees by 30 per cent for the duration of the Government imposed lockdown, and cancelled the annual bonus for 2020.
Further cuts to executive pay are expected after the PRA set out an expectation for banks not pay cash bonuses to senior staff, including all material risk takers, and to take appropriate actions with regard to the accrual, payment and vesting of variable remuneration over the coming months. The PRA also more softly recommended UK insurers to pay close attention to their approach to variable pay.
[1] Based on Minerva data as at 01/04/2020
Last Updated: 3 April 2020