The company received negative press when some employees failed to receive their 2018 annual bonuses. In our assessment of social risks, we pay attention to how companies treat a key stakeholder: their workforce. We look for a focus on key employee concerns, such as safe working conditions and competitive compensation. We believe companies that invest in and cultivate human capital are well positioned to realize a competitive advantage and deliver better business outcomes.
The ESG analyst, GIA [Global Industry Analyst], and portfolio managers requested a call with the chair of the compensation committee and human resources to discuss changes to the employee bonus plan and corporate culture… We sought to understand management’s process and how 2018 bonus decisions fit into their overall talent management strategy. We learned that the company changed its basis for awarding annual bonuses from individual to division performance without advance communication. This change deprived some employees of their bonuses, despite having achieved individual performance targets. The board acknowledged that it will take time to rebuild trust with employees but did not believe that it has negatively influenced staff turnover or morale. We believe that this was a missed opportunity for executives to generate goodwill with employees by foregoing their own bonuses in solidarity. The ESG analyst, GIA, and portfolio managers wrote a letter to the board and had several subsequent conversations to encourage a change in perspective from management and the board and to advocate for independent board leadership.
The cancellation of employee bonuses caused some equity portfolio managers to question the short-term nature of the company’s behavior. With this as a contributing factor, the GIA downgraded the company and several investors reduced or eliminated positions. Months later, the board opted to replace the CEO. Along with additional management and board turnover, this improved accountability and provided fresh perspectives. The GIA, along with several portfolio managers, have regained conviction and repurchased the stock.