Proxy Governance Friday Flash Update

As part of Boudicca’s COVID-19 Special Updates, we provide you with some fresh insights regarding diversity & inclusion and M&A.

Diversity & inclusion: Will your board step up for Black Lives Matter?

Special commentary by Fiona Hathorn, Chief Executive Officer, Women on Boards

When we first entered the COVID-19 lockdown, many may have wondered how long it would be before we could return to normal. Now, almost all leaders recognise that a reset to ‘business as usual’ is unlikely and, those ahead of the curve, also see it as undesirable.

It is not just business leaders who see the advantages in doing things differently, particularly as regard to diversity and inclusion. All around the UK, much of the general public have been attending protests as part of the global Black Lives Matter movement. They are your customers, suppliers, shareholders and employees. Increasingly these individuals are asking why they do not see anyone like them on the boards and/or senior leadership team, which in most cases today is still exclusively white and or male dominated?

Boards must step up by asking what their companies are doing as regards to culture, collaboration and inclusion. Not just because it is the right thing to do, but because it will very likely affect your company’s financial survival long term if you don’t.

This goes beyond the profound reputational risks I’ve mentioned. In May, we also saw the publication of McKinsey’s Diversity Wins research. Their third look at a correlation between companies’ diversity and profitability found an even stronger link between them. Taken together, I believe not stepping up with an impactful response to Black Lives Matter carries a significant business risk.

But when your board asks the question, please don’t accept the CEO’s most likely answer: ‘we have it covered by the D&I team’. Most Diversity and Inclusion teams do not have the resources and or the influence required across the firm to achieve anything material. Rather, I believe board members need to see evidence and treat inclusion like any other ‘business critical’ change programme.

One of the most visible aspect of diversity is representation on your board. Whilst non-executives’ expertise and board value add should remain the paramount selection criteria, do consider that retaining your ‘business as usual’ methods of board recruitment is likely to find similar candidates to those that you are most likely replacing.

Instead, Women on Boards challenge you to turn on the floodlights to boardroom talent. This means critically analysing what your board actually lacks in terms of skills, rather than outlining a desired career history in your candidate brief. It also means drawing your candidates from a broader pool than your own, or even a headhunters’, established network. I have seen the power of open advertising of board positions time and again, as Women on Boards’ members fill non-executive opportunities they found via our Vacancy Board. Whilst all were selected on expertise, many were only able to put themselves forward as companies had dared to go outside the ‘usual suspects’.

As with any corporate change programme, understanding your data is vital. This is where it is important to look beyond diversity demographics, and begin to measure inclusion – a key component to yielding the business benefits of diversity (McKinsey’s Diversity Wins). Whilst there is no straight-forward inclusion metric, the pay gap data offers a strong insight into how different groups of employees are valued within the company.

Although the gender pay gap reporting requirement was suspended this year due to the COVID-19 crisis, around half the affected companies have still chosen to submit their data. Boards should be questioning their CEO’s and asking not only for employment data on gender and ethnicity across the organisation but also on a divisional basis, alongside asking why their organisation has chosen not to report their Gender Pay Gap data. This data matters internally to inform the board and senior leadership on progress and inform evidence-based decisions on next steps in their D&I change programme.

Ethnicity pay gap data are not required by the government, although increasingly campaigners believe they should be. Prudent boards would get ahead of this curve and request their firm’s ethnicity pay gap be calculated to inform their internal decision-making. I admit that only the very bravest would publish it.

Of course, efforts to advance diversity and inclusion have been underway for many years now. Progress for many firms has been slow. However, McKinsey Diversity Wins identified ‘Fast Mover’ companies who have increased their ethnic minority representation from 1% in 2014 to 18% in 2019. It can be done.

In fact, there is substantial, robust evidence on what does and doesn’t work in diversity and inclusion. Unfortunately, some of the most popular D&I activities are also the least effective, including minority networks run by employees, unconscious bias training and cross-mentoring programmes (Kings College London).

Instead, companies need to look to the quality of all their leaders and managers and invest in collaborative leadership training. This is needed for the white men in or aspiring to leadership roles, not just the women and minorities who are keen to step-up into leadership roles.

Leaders who are collaborative and inclusive are best able to ensure progression and performance align at all career stages; rather than ‘business as usual’ where women are held back at an early stage by middle managers promoting people similar to themselves (McKinsey). It allows for teams to come together to share ideas and innovate; rather than compete in the all too common ‘status arena’ type meetings (UGM Consulting research). And making this style of leadership widespread across your organisation is what will shift the culture to become truly inclusive and supportive of diversity of all types.

Women on Boards UK, via our NexGenLeaders brand, today work with over 30 global companies to promote collaborative leadership and equip minorities to succeed. We have seen first had what works and what does not within companies, as they attempt to step up and improve their organisation’s cultures to become more transparent, open and inclusive.

Ultimately, what boards need to decide, is if they will respond to the disruption brought by COVID-19 and Black Lives Matter with change and innovation. Or if they will attempt to resurrect and preserve the old business as usual for as long as possible, in all likelihood, with dwindling success.

 Mergers and acquisitions at a time of coronavirus

Special commentary by Jonathan Spitzer, Executive Editor and Founder, CTFN

The market for corporate acquisitions – and specifically M&A – has begun a nascent recovery in the UK, as well as in Europe and North America, after the shock of the coronavirus lockdowns and the resulting equity market volatility.

During the second quarter, deal activity was at its lowest level for more than a decade. Two bright spots however seem to be that dealmaking interest picked up in June, and dealmaking with European targets was up year over year for the first half.

Still, the M&A market has been preoccupied with the fate of pending deals that were agreed to prior to the onset of the pandemic.

Several high profile transactions have fallen into litigation.

One example is the abandoned acquisition of Canada’s largest cinema operator, Cineplex, by the UK’s Cineworld. Cineworld informed the target that it believed Cineplex had breached the company’s merger agreement and also asserted a material adverse effect with respect to the target. For its part, Cineplex has disagreed with the buyer’s purported claims and noted it will sue for damages.

Deals that have thus far held together include the acquisition of Tiffany by LVMH, where reporting on LVMH’s desire for a price cut has been prevalent, as well as the purchase of GrandVision by EssilorLuxottica, where significant antitrust concessions meant to appease regulators could alter the economics of the transaction.

The pandemic has also rekindled certain nationalistic reactions against consolidation. The European Commission has led this charge suggesting member states take action to block predatory foreign direct investment. The UK recently followed suit, with its own draft legislation to allow the government greater say in takeovers, especially those involving foreign buyers.

Surprisingly, unlike during the 2008-2009 period, private equity transactions have held together or been newly announced. Blackstone’s move on NIBC bank in the Netherlands has seen a significant price reduction but it looks like the deal is progressing towards consummation. In Spain, Providence, Cinven, and KKR made an offer for telecoms maverick MasMovil.

As for shareholder activism, the economic fallout of the pandemic and the various policy responses form authorities appear to have undone the typical arguments for financial engineering that activists rely upon. For example, increasing dividends or share buybacks in a time of liquidity concerns do not appear to be strong arguments in the present environment.

This clearly alleviates certain pressure on corporate managers and boards.

Still, we have seen activists resume their activities, albeit with a governance and shareholder value bent that was less apparent previously. Take for example Elliott’s recent campaign with Crown Castle, the U.S. wireless towers company. Here, the activist is proposing an investment plan that seeks to improve the internal return metrics of the business, along with plans for improved governance, as the underpinnings of a dividend increase.

Managers seeking to head off activists would do well to be on the forefront of governance practices, as well as being mindful of securing sustainable and rewarding returns on investment.

With an eye to shareholders, how will companies grow earnings per share going forward, especially if economic activity is restrained?

Organic growth is likely muted, and as noted dividend increases and buybacks off the table.

At CTFN we project a recovery in deal activity in the second half of the year partly as an answer to this question, and as the new realities of the pandemic-laden world further normalize. Also, as winners and losers in the present climate adjust to the economic backdrop, we anticipate the bid/ask between buyers and sellers of large assets should start to narrow.

The next few quarters of deal making will likely reflect themes that may otherwise not have emerged. Moves that some companies thought impossible months ago now may be achievable; while other players may find themselves forced into making moves they otherwise would have resisted.

Some acquirers may seek to bring supply chain management in house, for example, and diverge from decades of outsourcing; while others may seek to refocus on their core business and sell off ancillary assets.

In today’s climate, responsible acquisitions that preserve and grow stakeholder value while taking advantage of the new environment that presents itself, could prove a sensible strategy for boards and corporate managers.