Investors should pay more attention to people, says Federated Hermes

Federated Hermes has strengthened its emphasis on social issues in its latest voting and engagement policy, with new expectations for diversity, tax and pay.

During a briefing on the new document today, Bruce Duguid, head of stewardship at firm’s proxy advisory arm, EOS, said that people were a “really important” part of businesses, but one that was “often not looked at highly enough by investors”.

Under the new voting policy, which is used to advise $1.3trn in assets – including Federated Hermes’ own $669bn portfolio – companies will be required to publish diversity, equity and inclusion plans that “address the ethnicity pay gap, alongside the gender pay gap, which is now more established,” explained Amy Wilson, who leads EOS’ European engagement work.

“We’ll be pushing for minimum standards for board and management diversity through our various [voting] policies,” Wilson continued, adding that there was “great scope for improvement beyond those minimums” which could be discussed with companies as part of broader stewardship efforts.

Boards should strive to have at least 30% female representation in Europe, the policies state. In the UK, EOS will next year expand its requirement for FTSE100 companies to have at least one director from a minority ethnic group to the FTSE350.

Last year, the UK government concluded that 94% of the FTSE100 had met that requirement, which was recommended as part of the 2017 Parker Review on Improving the Ethnic Diversity of UK Boards.

On remuneration, Duguid and Wilson said the cost of living crisis had thrown the pay gap into sharper focus over the past year, with a trend for “increasingly disenfranchised employees”.

“We’re intensifying our engagement on paying living wages across direct operations and supply chains,” said Wilson. This could be through accreditation schemes like the UK’s Living Wage Foundation, or through more discretionary approaches based on the circumstances of individual companies, she continued.

“We want to get into the complexity of those debates. We are looking for something robust that demonstrates that what companies are offering [to employees] is fair.”

The new voting policy also lays out expectations on aligning executive pay with broader “stakeholder considerations” such as the correlation between pay increases at the top and bottom levels of a company, and the fall-out from incentive schemes that were introduced for executives during the pandemic.

EOS will publish a paper later this year setting out its ‘responsible tax’ principles, which will centre on the need for companies to pay taxes in the countries in which they make money.

“In the wake of the pandemic and under pressure from inflation, we’re seeing public services under considerable strain, which poses a risk to any companies seeking to aggressively minimise their tax payments – they may face increasing legal, financial and reputational risks,” said Wilson.

“Investors really need enough information to gauge a company’s tax position and governance approach so we can assess those risks […] that’s going to be an important topic for us.”

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