Corporate Governance and CSR – Disclosure and Engagements: What to expect for 2021?

The 2021 reporting season will be challenging. The Covid-19 disruption creates particular company-specific situations and simple referrals to “best practices” will not be sufficient. This offers the chance to prepare and arrange individual messaging and make use of the time remaining until the counterproposal to the responsible business initiative becomes effective, in particular the non-financial disclosure that will be legally required starting in the financial year 2022. 

by Barbara Heller and Christoph Wenk Bernasconi

Corporate reporting and communication for the periods following a year of disruption due to Covid-19, political and public discussions on climate change, social responsibility and governance, including the public vote on the “Responsible Business Initiative” will become increasingly challenging and remain important for the reputation of companies, their boards and management. The most recent SWIPRA Corporate Governance Survey unveiled what the expected priorities of investors and companies are.

An often raised question following the particular “shareholderless” general meeting situation in 2020 concerns the AGM organization. Investors and companies agree that a fully virtual format is not the way forward, rather should the AGMs of the future be hybrid, allowing a structured virtual and physical shareholder interaction with companies’ boards of directors.

There is less agreement amongst market participants on how to reflect the Covid-19 impact in decisions concerning variable compensation for 2020. 24% of the investors believe the performance targets for variable compensation should not be amended, 27% would agree with adjustments of the target to the same extent as the overall guidance, and 32% with adjustments somewhere in between. There is no best practice in dealing with this question, as the ultimate decision will have to fit the individual company’s strategy in approaching the crisis. It should become best practice amongst companies, however, to disclose and speak about these individual decisions more comprehensively and transparently with their stakeholders. Importantly, this explanation should not only rely on additional disclosure but rather also include a more active personal engagement, genuinely supported by a private-to-public dialogue led by the board of directors and its chair specifically. 66.67% of the survey’s investor participants, however, consider board leadership in terms of CSR efforts insufficient. Covid-19 also clearly acted as a catalyst for topics investors will focus on in their 2021 engagements: 67% of the investors indicated that social topics, such as employees, diversity, child labor, etc. will become a higher priority, 61% see leadership becoming a more important talking point. About half of the respondents believe environmental topics will gain additional attendance (see Figure 1).

Figure 1: New Engagement Priorities, SWIPRA Survey 2020, left hand: shareholders, right hand: companies.
Question: What influence do you expect the Covid-19 pandemic to have on your corporate governance/CSR engagement priorities with your portfolio companies? (Percentages summarize two answer options indicating higher priority)

The survey also revealed that the current development in the US towards higher AGM support for ESG-related shareholder proposals might transfer to Switzerland: more than half of the Swiss and 69% of the non-Swiss investors stated that they are likely to support shareholder-sponsored ESG agenda items. The upcoming, legally required vote on the non-financial report may mitigate the risks of shareholder-sponsored proposals, similar to the vote on the compensation report allowing shareholders to voice their criticism on the compensation scheme of a company.

The proper reflection of these non-financial topics in the overall reporting will gain further importance. According to the survey, only 17% of the participating investors (and 54% of the companies) identified a clear link between corporate social responsibility and corporate strategy (see Figure 2).

Figure 2: Link between CSR and Strategy, SWIPRA Survey 2020, left hand: shareholders, right hand: companies.
Questions [Shareholders]: How do you assess the disclosure of listed companies in Switzerland with respect to corporate social responsibility (CSR/ESG)? [Issuers]: How do you assess the disclosure of your company with respect to corporate social responsibility?

The basis for such a credible forward-looking integration is a materiality assessment of the company’s CSR factors. According to the survey, less than half (42%) of the participating companies have done such a materiality assessment, 33% are in the process. It is, therefore, not surprising that only 27% of the investors truly understand which CSR factors are relevant for a company. As a result, many investors rely on CSR ratings to fill this gap. And despite the comparably low trust of market participants in the reliability of these ratings, only 22% of investors and 14% of companies see them as truly reliable, they seem to have a notable direct impact on investments (indicated by 52% of Swiss investors) and the valuation of the company (indicated by 50% of the non-Swiss investors; as shown in Figure 3).

Figure 3: Reliability of CSR ratings for company assessment, SWIPRA Survey 2020, left hand: shareholders, right hand: companies.
Question: In your opinion, how reliable/robust are the most widely used ESG ratings (e.g., Sustainalytics, MSCI ESG, ISS Quality Score) for an individual assessment of a company’s ESG performance (i.e., how sustainable is a company overall)?

Not only the disruption caused by Covid-19 and the upcoming legal requirements regarding non-financial reporting force companies to accelerate their efforts on these topics, but their stakeholders have also been looking for information and guidance over the past years. It is an opportunity now to develop a resilient individual financial and non-financial reporting framework. Interestingly, in the survey, a “say on sustainability” that will now eventually become reality in Switzerland was highly controversial with a majority of shareholders being in favor and a large fraction of issuers against it. Yet, the reporting obligation and shareholders’ right to vote on such a non-financial report going forward is a chance to highlight a company’s efforts on its strategic integration of corporate social responsibility, to explain related opportunities and threats and to develop an organized and regular exchange with its stakeholders, also on the non-financial aspects of a business. At the same time, it is obvious that the content and messaging of such a report and engagement discussions is highly company-specific and, therefore, relying on some of the easy to fulfill, best practice frameworks will generally not be the recommended way forward. 

About SWIPRA Services

SWIPRA Services provides corporate governance, CSR and shareholders services for companies and their boards of directors as well as for institutional investors in responsible investing. We work with our clients with the goal of long-term value creation, based on principles of value-based management and empirically relevant criteria. SWIPRA Services is an exclusive partner of Morrow Sodali in Switzerland. SWIPRA Services is working with a high-profile think tank to further develop corporate governance in Switzerland: Members

About the study

The SWIPRA Corporate Governance Survey was conducted for the 8th time in collaboration with a team of researchers from the Institute of Banking and Finance at the University of Zurich and covered all companies listed on the Swiss Performance Index SPI® as well as institutional investors from Switzerland and abroad. During the survey period (August/ September 2020), 73 Swiss companies listed on the SIX Swiss Exchange, representing about 77.2% of the market capitalization of the Swiss Performance Index, and 76 institutional asset managers and asset owners from Switzerland and abroad, representing more than 27% of the equity investments managed worldwide, participated.

Barbara Heller, Managing Partner SWIPRA Services Ltd

has many years of experience in corporate finance, capital markets and corporate governance advisory from various assignments in international investment banking, and as executive and board member. Currently she is a Member of the board of directors and chairwoman of the Audit Committee of Bank Cler Ltd, Member of the Investment Committee of Transparenta Collective Pension Foundation, Vice-Chairwoman of the Swiss CFO Forum, Chairperson of the Jury of the Swiss CFO Award and Of Counsel at Lemongrass Communications Ltd. Starting April 2021, she will become a member of the board of directors of Graubündner Kantonalbank. She holds an MBA in economics and finance from the University of Zurich.

Christoph Wenk Bernasconi, Partner SWIPRA Services Ltd

is a founding member of SWIPRA and responsible for the scientific approach of its projects and analyses. He is co-author of the SWIPRA Considerations for Corporate Governance and of the SFI Whitepaper on corporate governance. Further, Christoph is a Senior Researcher at the Department of Banking and Finance at the University of Zurich.