When the corporate board and management team make changes that show they are being responsible and putting shareholders first, good things can happen.
FedEx recently raised its dividend by 50 percent and made governance changes that helped its stock price jump 14.4 percent in one day. Some companies would be happy with a stock price increase of 14 percent in one year—but FedEx achieved a significant stock price gain during the current bear market conditions by making changes that are convincing investors that it is focused on creating long-term shareholder value.
Although these changes came about with ongoing pressure from dissident shareholder D. E. Shaw, the benefit to the company and shareholders appears well worth it. Corporate board members might find some of the changes that were made worth considering:
• Increasing shareholder dividend. Raising its shareholder dividend by 50 percent is the most obvious action that contributed to the stock price gains, but there is much more to it than that. Having the confidence to approve a substantial dividend increase when market analysts are predicting a market crash and recession send a clear message to shareholders that even if times get bad, the board has made sure they will be taken care of. The company leadership wouldn’t have approved such a move unless they were confident that they’ve put in place systems that ensure long-term growth. Shareholders will have greater confidence in the management team’s decisions because of the benefits they will reap from this one move.
Of course, not every company pays a dividend, but every company can consider ways to deliver company profits to shareholders. Companies that have enjoyed record profits during the pandemic might want to consider developing plans for a special dividend distribution, stock buyback plan or stock split in the future.
• Compensation plan adjustments. By making changes to its compensation plan, the board and management team are sending the message that they have a greater commitment to fairness and the governance best practice of pay for performance. The company has added a total shareholder return (TSR) performance metric to its cash-based long-term incentive (LTI) program and lowered the program’s capital expenditures as a percentage of revenue (CapEx/Revenue) metric to improve returns. In a statement, FedEx said these changes are designed “to make management compensation more directly tied to delivering outstanding TSR and long-term values creation.”
By making these changes, the board and management are sending the message that they are interested in adopting governance best practices – particularly dealing with compensation issues. This shows shareholders that the board and management team are not more interested in paying themselves as opposed to delivering fair compensation for good performance. This year, there has been an increase in shareholders voting against company pay plans, so FedEx seems to have addressed the issue before shareholders brought it to a vote.
• Changing board composition and function. The FedEx board added Amy Lane, a director at NextEra Energy Inc. and TJX Companies Inc., and Jim Vena, former CEO of Union Pacific Corporation as independent directors, with a third director to be added at a later date. The willingness to broaden the board’s skills and experience at a time when major changes are taking place in the economy and around the world is a positive step that shows the company wants to make sure it has the right brain trust to tackle any potential risks to its bottom line. The willingness of the board to collaborate with D. E. Shaw in bringing in new directors is also in the best interest of everyone.
The FedEx board has also shown the foresight to make adjustments to the functions of its Nominating & Governance, Compensation and Information Technology Oversight committees. The board has renamed them and is charging them with developing more strategies to deal with future risks and new challenges the company may face.
With predictions of recession being bandied about, it may be a good idea for all boards to consider if the committees they’ve set up are focused on the right oversight that will enable the company to make it through the recession without substantial losses. Demonstrating what the company is doing to guard against a downturn will pay major dividends in terms of trust with shareholders in the future.
