As many businesses’ operations came to a grinding halt on Friday when South Africa entered a 21-day lockdown, it has become clear to many listed companies that they will struggle to meet their 2020 targets.
On Wednesday alone, four JSE-listed firms withdrew their earnings guidance for 2020 and promises of dividends to shareholders. Vukile Property Fund, which currently pays out 100% of its distributable earnings as dividends, said its board would now reconsider that policy before withdrawing dividend guidance for the year ended 31 March 2020.
Its peers in the real estate investment trusts (REITs) industry, Hyprop, Attacq and NEPI Rockcastle also said the spread of coronavirus, which is affecting their retail clients during this lockdown, has caused a “high degree of uncertainty” on dividends.
While other companies haven’t withdrawn dividends or their earnings guidance, the crash in stock markets around the world has wiped out billions of rands in their market capitalisation, raising questions on whether boards shouldn’t also re-look at executive remuneration and directors’ fees so that the pain of the crisis is not only borne by shareholders.
Focus on preserving cash
“They want to maintain their cash levels while observing what’s going on. I think that’s a prudent thing to do in this environment,” says shareholder activist Theo Botha.
He said companies are probably asking themselves how long they can go with their current cash levels in the current lockdown, given that they still have fixed expenses and staff salaries to pay. But they have probably also started asking themselves how long they can continue if the lockdown period is extended.
“Can companies last for another two months before saying to themselves, ‘We have to take some sort of corrective action of reducing staff members’? So, all the dividend announcements coming out now are about preserving balance sheets,” adds Botha.
Should cutting executive pay be next?
Many companies continue to pay their employees during the current shutdown, and executives’ remuneration is no different. But Botha thinks this could quickly need a review if the country’s lockdown period is lengthened.
Martin Hopkins, Head of Reward Advisory Services at Bowmans – formerly Bowman Gilfillan – says altruism in the form of cutting top executives’ basic pay to avoid mass retrenchments could serve companies well in the Covid-19 crisis. Disney announced this week that several of its executives will take a paycut due to the coronavirus pandemic, and the company’s chairman will forgo his salary entirely. Hopkins says South African executives could be awarded with restricted shares in the interest of preserving cash. Companies like Barclays adopted this strategy after the 2008/2009 global recession, when Bob Diamond got shares instead of his 2009 cash bonus. But what would be a reasonable cut?
“My thinking is somewhere around 15% to 30%, but every case will need to be treated on its merits. We are in unprecedented times, but this quantum seems reasonable in my opinion, to show solidarity with employees and society in general,” says Hopkins.
He adds that the guaranteed pay component of executive remuneration in South Africa typically makes up around 30%-50% of top bosses’ salaries and rewards package. The remainder is linked to performance. He says these performance-based bonuses are unlikely to be payable anyway this year. “But I think it will be inflammatory to pay substantial executive bonuses when other employees, and society at large, are in economic distress,” he says.