EOS at Federated Hermes, the leading stewardship provider, has today published its 2021 UK Corporate Governance Principles. In a letter to 124 listed UK companies, EOS has outlined its expectations across a number of important strategic governance, environmental and social topics. The Principles will guide the team’s corporate engagement programme and approach to recommending votes at shareholder meetings throughout the course of the year. Currently advising on £938bn1 of assets, EOS represents long-term investors who seek to be active stewards and owners of shares or debt of the companies in which they invest.
The updated voting policies reflect the importance of long-term issues such as climate change, remuneration and diversity. However, the letter also makes it clear that considerations around the need for a consistent leadership will be taken for companies facing acute distress due to the ongoing Coronavirus pandemic.
Focus areas for the year ahead are concentrated on three key issues:
Diversity and inclusion on boards and beyond
Many companies continue to fall far short on gender equality and this year the business world has experienced renewed concerns about racial and ethnic representation. As such, in 2021 EOS will be introducing several new, stricter policies with regards to voting against companies making insufficient progress on diversity and inclusion, and will be taking an industry leading policy position on diversity below the board level.
- Extending the existing recommendation of a vote against the chair of any FTSE 100 company with an all-male executive committee, to recommending a vote against the chair of any FTSE 100 company with materially less than 20% female representation in the combined population of the executive committee and its direct reports2
- New policy in 2021 will see a recommendation against the chair of the board of any FTSE 100 company that does not have at least one director from an ethnic minority background3 and has no credible plan to rapidly achieve this. Continue to support the recommendations of the Parker Review4, including the minimum expectations that FTSE 100 boards have at least one director from an ethnic minority background by 2021 and FTSE 250 boards have the same by 2024.
Minimum standards on climate change disclosures
Climate change presents a very real threat to the value of assets and tough action will be taken against companies that are failing to address this systemic risk.
- For the first time a vote against the chair of the board or responsible directors of companies will be recommended where a company’s strategy is materially misaligned with the goals of the Paris Agreement. A vote against would also be recommended where companies do not demonstrate sufficient management of climate-related risks, such as those below a Level 4 management rating from the Transition Pathway Initiative5, (vs Level 3 in 2020).
Executive remuneration aligned with long-term value creation
The pandemic has highlighted the shortcomings of the conventional approach to remuneration and the need for simpler pay schemes that are aligned to long-term success.
- Boards must use their judgement to ensure executive pay can be justified in the context of the experience of broader stakeholders, particularly for companies that have made redundancies or made use of government support including to furlough employees during the pandemic.
- Continuation of policy addressing minimum executive shareholding requirements, fixed variable pay opportunities and performance metrics, ensuring that each are aligned to building a long-term sustainable business
Commenting on EOS’ Corporate Governance Principles for the 2021 season, Amy Wilson, UK Engagement Lead, EOS at Federated Hermes said:
“The past year has seen a heightened focus on diversity and inclusion and we believe now is the right time to continue to advance our expectations of companies and provide a leading voice on this topic for stakeholders. Climate change is another pressing global security challenge that presents a systemic risk to our clients’ portfolios and in 2021 we will be taking tougher measures against companies with strategies that are not aligned with a transition to a low carbon economy. While the pandemic has presented additional challenges for many businesses, it is important now more than ever that they demonstrate a long-term approach to sustainability.”
Dr. Hans-Christoph Hirt, Head of EOS at Federated Hermes added:
“As boards deal with the ramifications of Coronavirus, our aim is to support companies in taking a long-term approach in pursuit of a meaningful business purpose as the best means of managing through a crisis and sustainably creating wealth. At a time when difficult decisions may be required, businesses must remain focused on creating sustainable value for investors, stakeholders and wider society and our updated Principles aim to address the long-term challenges to this.”