Institutional Investor Survey Highlights Increasing Engagement

The proxy season is almost upon us — that time in the first quarter of the year when most companies publish their proxy statements, which lay out the agenda and items to be voted on at their annual meetings. A company’s proxy statement also contains most of its corporate governance information as well as a summary of its executive pay practices.

The proxy statement is the document that most institutional investors use to begin their research on a company’s governance, pay, and environmental, social, and governance (ESG) practices to determine how to vote at the annual meeting and whether they want to engage with a company on any particular issue. It is no coincidence that increased engagement in the last decade has led to some improved governance practices (e.g., on pay, on majority voting for directors) as well as better disclosures (e.g., on pay, on governance practices).

Proxy season is a good time to take stock of the current state of global governance and engagement between issuers and investors. Luckily, someone has done this for us, so we can sit back and take in the results. A February 2018 survey by consultancy Morrow Sodali highlights the current state of engagement between global institutional investors and the companies in which they invest.

According to the survey, institutional investors want more detailed disclosure from portfolio companies about their boards of directors, business strategies, and ESG. Just over 40% of the assets under management represented in the survey are managed passively, according to Morrow Sodali. Increasingly, we are seeing passive managers turning to engagement with issuers — including the resources they commit to engagement — to drive alpha, as these managers do not have the option to sell.

The survey highlights three main areas of concern for investors going into the 2018 proxy season:

1. Clear articulation of a company’s business strategy and goals
2. Directors’ skills, qualifications, experience, and individual contribution to the effectiveness of the board
3. Detailed business rationale for board decisions and their alignment with strategy and financial performance

The survey was conducted between November and December 2017. Forty-nine global institutional investors, with US$31 trillion of assets under management, responded to the survey.

Survey respondents also indicated that:

• Investors will prioritize directors’ skills ahead of gender or ethnic diversity.
• Unjustified pay will come under intense scrutiny.
• Investor collaboration around broader annual shareholder meeting topics will increase exponentially.
• Institutional investors will be increasingly likely to support a credible activist story.
• ESG issues are either fully integrated or progressing toward full integration with investment decision making.
• Investors will seek enhanced disclosure around materiality and sustainable metrics linked to long-term business strategy.

These comments about ESG and sustainability information further confirm what CFA Institute found in our 2017 ESG survey, in which about three-quarters of CFA members stated that they factor ESG data into their analysis.

Though investors will no doubt argue that there are still battles to be fought on governance, compensation, and ESG issues, it is important to take stock of where we were versus where we are now. A decade ago, many companies were just begrudgingly beginning to allow say on pay votes and majority voting for directors. It was almost unheard of before the global financial crisis for compensation committees to take the time to describe how pay is linked to the execution of strategy. Now, this is something that, although not as common as it could be, is thought of as a best practice. Issuers are more open about the skill matrices they use to ensure a board has the expertise it needs. Remember, at the height of the financial crisis, there were boards at too-big-to-fail financial institutions that did not have a single person who could understand their derivative exposure. That isn’t the case today.

Although shareowner rights have improved with the wider adoption of proxy access, there is also backsliding in some markets with the increased adoption of dual-class voting structures that tend to disenfranchise shareowners.

The Morrow Sodali survey provides a snapshot of where we are that we can compare to the governance landscape of the past. Let’s hope in 10 years’ time, a Morrow Sodali 2028 institutional investor survey will show that more progress has been made.