Issue #19                                                                                                 July 2020
Shareholder Involvement in Times of COVID-19
by Professor Josep Tàpies

The above-mentioned title invites us to reflect on what we understand the terms “shareholder” and “investor” to mean. And we could even go a little further and delve into what the term “owner” means as well.
The shareholder
In the legal realm, when we talk about shareholders, we are referring to those natural or legal persons who own one or more shares of a company. This gives these individuals rights that are clearly defined in corporate law.
The financial literature generally refers to shareholders as those natural or legal persons who only are looking for compensatory returns for the risks incurred in investing in shares rather than other financial assets.
Both views are clearly over simplifications which probably stem from the need to be able to “fit” the concept of shareholder into financial models, making it something mathematically interpretable.
The investor
An investor is a person who, by buying shares, invests their money in a project that they know well, and from which, in doing so, they expect a certain return.
The owner
An owner is the shareholder who, having invested money in a project he or she knows well, considers it to be his or her own. Owners care about the purpose of the project they’ve invested in. They believe in the very nature of it (its values) and share the same long-term ambition for it (or vision) as the board of directors, the senior management team, and the rest of the shareholders.

Oftentimes, when speaking of owners, people confuse the idea with absolute owners of companies who look on the company as a personal asset they can do with as they please. Nothing is further from the idea of ownership that we’re describing here. Our notion of ownership understands the shareholder in question to be emotionally invested in the company, they feel it is truly theirs; they are part of it. Because of this sentiment, the term “emotional property” is often used in relation to owners. They are those shareholders who, in addition to expecting financial returns, want to support the company in its long-term aspirations.
COVID-19, shareholders, investors, and owners
If our shareholders were only financially-invested shareholders, perhaps they’ve abandoned our shareholdings in a panic to seek refuge in other financial assets with lower levels of risk. If, on the contrary, they personally believe in the project, we have to get them involved or, at the very least, keep them promptly informed on the outcomes and consequences of the tactical and strategic decisions made to overcome the COVID-19 situation and where the company will come out after weathering the storm.
When it comes to deciding what to do in the face of this new situation created by the COVID-19 pandemic, the board of directors must focus on two things: survival and adapting to these new circumstances.
During tough times, we have to pay particular attention to two key variables for the survival of our companies: cashflow and our concept of the company.
When it comes to cashflow, the board of directors will most likely have already dealt with the situation, since without cashflow, survival is impossible. However, when it comes to making decisions to generate or maintain cashflow, we can’t lose sight of our concept of the company, which, for us, is structured around four communities of people:

-customers/clients for whom the company meets a real    need;

-employees, whom the company develops personally and professionally;

-stakeholders, who are key partners for the company’s sustainability; and

-shareholders, who must be remunerated fairly, and whose collaboration is asked for especially in turbulent times.
Company sustainability
This is the second variable we need to focus our attention on. Review the fundamental aspects of your company to see if it makes sense to maintain how things were done pre-COVID-19. Or if, to the contrary, it is time to rethink things because our clients’ needs have changed. 
It is also essential that we examine our long-term ambition, our vision. COVID-19 may compel us to rethink it. If this proves to be the case, you have to ask yourself: Can I count on my shareholders for this? Or, to put it more frankly: Do I have the right shareholders?
In especially trying circumstances such as those brought on by the pandemic, it is crucial we know whether our company has shareholders with an exclusively financial vision, if it has investors who intend to stick around, or if the company has proprietary shareholders.
If we don’t know our shareholders’ typology and their expectations, coming up with a successful strategy to get them involved will be extremely difficult. 
Answering the question of whether your company has the right shareholders and acting accordingly should be an ongoing task, which requires early differential diagnosis, calm and constructive dialogue, and determination. After avoiding bankruptcy and ensuring the best possible CEO succession when the times comes, this is likely the third top responsibility of the board. 
The opportunities and circumstances that present themselves to a given company may not always be convenient for all its shareholders. The opportunity criteria for all shareholders is a field for corporate development. The opportunities that will be taken or rejected by them should be foreseeable.
Gaging this does not require a detailed strategy plan, but rather a corporate framework sufficiently outlined and debated by the board over time.
It isn’t a question that can be improvised.

Josep Tàpies
Professor of Strategic Management
IESE Center for Corporate Governance

Corporate Governance News

European Supervisory Authorities respond to Non-Financial Reporting Directive
The EBA, EIOPA and ESMA have responded in a joint letter to the European Commission consultation on a revision of the Non-Financial Reporting Directive. The three proposed areas of recommendation are to introduce a higher level of standardization of the disclosure requirement of non-financial information, to widen the range of companies required to report, and to ensure consistency between legislative initiatives on sustainable finance… read more 
Reform of the Spanish Code of Corporate Governance
The Spanish Securities and Exchange Commission (CNMV) has approved a reform of the good governance code for listed companies. The four axes of reform are promoting the presence of women on boards, greater importance of non-financial information and sustainability, more attention to reputational risk, and clarification of aspects related to the remuneration of board members… read more
Shareholders unanimously vote for Danone to become the first listed “Entreprise à Mission”
With the support of more than 99% of its shareholders at its Annual General Meeting, Danone has become the first listed company in France to adopt the “Entreprise à Mission” model. In its articles of association, the company has now officially embedded social and environmental objectives that reflect its conviction that the health of people and the preservation of the planet are interdependent. This is reflective of Danone´s new pursuit of a model of sustainable value creation for all its stakeholders… read more
Top DAX company Wirecard collapses owing $4 billion
German fintech company Wirecard collapsed on Thursday owing creditors almost $4 billion after disclosing a gaping hole in its books that its auditor EY said was the result of a sophisticated global fraud. German Finance Minister Olaf Scholz described the collapse as a “scandal”, acknowledging it was time to review regulation… read more
Foreign direct investment and M&A activity drop globally
According to sources consulted by Axios, protectionism is poised to play an elevated role in global deal making, particularly as countries grapple with the economic fallout of COVID-19. Governments around the world are creating new regulations and incentives to maintain local ownership of homegrown companies… read more
Big tech to take action on racial gaps
According to Axios, tech giants are starting to open their wallets to confront racial inequities, but the issues that the industry needs to address go far beyond simply writing checks… read more
Climate change and coronavirus: Black swans or gray rhinos?
Climate change and the coronavirus have a lot more in common than the letter C, but their differences explain society’s divergent responses to them… read more
Coronavirus reveals the importance of building resilience into the business model 
A recent analysis published by asset management BlackRock shows that investment funds tracking the performance of corporations considered to be more committed to environmental, social and governance (ESG) issues have, thus far, fared the Covid-19 crisis far better than others… read more

In Case You're Interested...

Stakeholder vs. Shareholder Capitalism: The Great Debate

Prof. Lucian Bebchuk of the Harvard Law School and Prof. Colin Mayer, CBE of Saïd Business School, Oxford, debate one of the great controversies in business today: Should companies be governed and run for shareholder or stakeholder interests?... watch here

Measuring Stakeholder Capitalism

As companies continue to focus on long-term value creation in the face of economic recovery, operationalizing ESG will be critical. In this June 16 panel discussion, CEOs and leaders of the World Economic Forum International Business Council (IBC) discuss their philosophies and progress to date on a measurable reporting framework that is being developed for companies across the globe… watch here

Undue Short-Term Pressure on Corporation

In this report, the European Supervisory Authorities (ESAs) investigate potential sources of undue short-termism on corporations from the financial sector and provide advice on areas which regulators should address… read more

Sustainable Finance and the Role of Securities Regulators and IOSCO

The Second Shareholder Rights Directive (“SRD”) aims to improve shareholder engagement and increase transparency around stewardship. The second Shareholders’ Rights Directive (SRD II) puts a new focus on encouraging long-term shareholder engagement in listed companies, in particular by addressing new obligations to asset managers, institutional investors and proxy advisors. HSBC’s new guide explains what is happening and describes the key phase 1 and phase 2 implications for market participants… read more

How the Board’s Role May Evolve in Times of Crisis

Amid COVID-19, organizations are facing a record number of unprecedented situations—from massive operational pivots to reopening offices to pandemic-related health challenges. In times of crisis, the board’s role often must evolve to support management. But, what governance model is best suited for a pandemic? In this episode, Shellye Archambeau explains how boards may need to evolve and adapt in times of uncertainty… watch here

Recommendation From the SEC’s Investor Advisory Committee Relating to ESG Disclosure

The SEC’s Investor Advisory Committee (IAC) issued a recommendation relating to environmental, social, and governance (ESG) disclosures recommending that the SEC begin an effort to update the reporting requirements of issuers to include material (decision-useful) ESG factors. The IAC stated that there is a lack of material, comparable, consistent information available to help investors with their decisions… read more

COVID-19 and Corporate Governance: What’s Shifting and Why

How has COVID-19 and the shift to widespread remote work changed the corporate board meeting? How are digital tools helping? How do you affectively communicate with participants who are accustomed to receiving paper briefs before the meetings? Any tips for facilitating effective and balanced conversation during a virtual board meeting? All questions answered in this interview with Dottie Schindlinger, Diligent Corporation’s Governance Technology Evangelist… read more

IESE's Recent Research on Corporate Governance 

“Understanding the impact of symbolic and substantive environmental actions on organizational reputation”

Journal article (May 2020)

Journal: Industrial Marketing Management
Authors: Truong, Yann; Mazloomi, Hamid; Berrone, Pascual
Read summary

“The Common Ownership Trilemma”

Journal article (May 2020)

Journal: The University of Chicago Law Review
Author: Azar, José
Read article

Upcoming Programs

Executive Program: “Value Creation Through Effective Boards”

Date: September 21-24, 2020

Location: IESE, Barcelona Campus

Visit the program website
A Way to Learn. A Mark to Make. A World to Change
Barcelona    |     Madrid     |     New York     |     Munich     |     Sao Paulo