Companies fail to explain board picks to investors

EY study calls on companies to better explain board composition and improve investor communications 

More than 75 percent of institutional investors say companies are not doing a good job of explaining why their directors are the right people for the job, according to a survey by the EY Center for Board Matters.

The lack of explanation comes at a time when investors are increasingly looking for confirmation that boards of directors have the skills and expertise needed to monitor key risks and provide strategic counsel to the company, the survey says. It also comes amid increasing pressure for proxy access by investors.

The survey, part of a series of studies designed to explore the current proxy season, finds that 76 percent of respondents say ‘no’ when asked whether companies ‘do a good job of explaining why they have the right directors in the boardroom’, while 24 percent answer ‘yes’.

‘Given investors’ increasing focus on board composition, companies may want to review and enhance proxy statement disclosures to ensure director qualifications are explicitly tied to company-specific strategy and risks, and that the board’s approach to diversity and succession planning is transparent,’ the study says in its conclusion.

The research adds that growing pressure on companies to grant proxy access to long-term significant investors makes it even more urgent that companies communicate effectively with investors this proxy season. Bank of America recently amended its bylaws to allow proxy access for investors or groups of investors that have owned at least 3 percent of the company’s shares for at least three years.

The bank’s move came as major investors including BlackRock, CalPERS, CalSTRS, Norges Bank, Vanguard and others have been calling on companies to allow proxy access under the so-called three-and-three rule. Proxy advisory firms such as ISS and Glass Lewis have also backed the move.

EY’s study encourages companies to study the composition of their boards and to enhance and increase communications with investors about their directors. ‘Beyond disclosure, ongoing dialogue with institutional investors that involves independent board leaders may allow for a rich discussion around board composition,’ it notes. ‘Also, through regular board refreshment and enhanced communications around director succession planning, companies may head off investor uncertainty and temptation to go down a rules-based path regarding director terms.’

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