AGMs 2018: Investors target strategy and board composition

Mar 14, 2018
Survey finds ESG engagement focus will be on board skills and experience

Investor relations and governance teams working on and around AGMs this proxy season should be paying particular attention to the stories their companies are telling about strategy, who is on the board and ESG-related efforts, according to new research.

A Morrow Sodali survey finds that 68 percent of institutional investor respondents cite as highly important ‘the quality and completeness of [a company’s] disclosures on business strategy and issues of material importance’ when making voting decisions on director elections and other agenda items.

Sixty-six percent of respondents point to board composition as being highly important when deciding on AGM votes. Sixty-three percent say the company’s ESG policies and practices are key. Fewer – though still a notable proportion of – respondents point to a firm’s quality of shareholder engagement (51 percent) and ‘the availability of its board members to communicate directly with shareholders’ (39 percent).

Morrow Sodali polled 49 institutional investors managing combined assets of more than $31 tn between November and December 2017.

Much of the attention paid to the investors’ increased focus on ESG issues has been centered around climate change. But 59 percent of respondents in the Morrow Sodali survey say board skills and experience will be among the most important ESG topics to them when engaging with companies in 2018 – up 50 percentage points from the survey last year.

Noting this ‘significant’ shift, the report’s authors write: ‘Respondents are turning up the heat on director accountability and oversight. Broader issues continue to evolve such as technology transformation, disruptions and stakeholder considerations.’ By contrast, 27 percent say board diversity is a key ESG topic for engagement, despite this having been a high-profile issue over the past year.

Morrow Sodali chair John Wilcox tells IR Magazine that the focus on skills and experience highlights the growing importance of boards’ stewardship and imposing high standards on themselves. There is a trend among institutional investors toward understanding what goes on inside companies and on their boards, and therefore they want to understand the skill sets among directors, he says.

The good news for companies is that this marks a step away from investors having a ‘checklist mind-set,’ Wilcox adds. Even if a company doesn’t meet best practices, this approach by investors gives the firm a chance to explain how it operates – more along the lines of the ‘comply or explain’ model often seen in Europe, he explains.  

Climate change disclosure ranks just behind board skills and experience: 54 percent of respondents cite this as important in terms of ESG engagement, up 10 percentage points from last year. The third-rated key focus, cited by 41 percent of investors, is ‘ESG risk management and opportunities’ – up from 24 percent in 2017. Wilcox says this reflects a growing sense that there are opportunities for companies in addition to risks related to ESG matters.

Institutional investors were also asked what information should be disclosed about a board’s composition to enable them to make an informed vote on director elections. Fifty-six percent say the most important topic is the relevant background and experience of individual directors, while 41 percent say the disclosure of a board skills matrix is most important.

‘This stands in stark contrast to more detail on the selection and nomination process, where only 7 percent of respondents felt this was the most important issue,’ the authors say.

Asked which diversity criteria get the highest importance rating, 71 percent say skills, 17 percent say experience, 7 percent say gender and 2 percent say age. Overall ethnicity ranks below these in investors’ responses.

‘These results demonstrate that while gender, ethnicity and age diversity are of course important they should not in any way distract boards from recruiting directors who have the right skills and experience for the roles,’ the authors write. ‘The focus on gender diversity remains a perennial issue across markets and should remain the focus of respondents and the companies themselves.’

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