The EY Center for Board Matters has identified investors’ top priorities for companies in 2018, based on its annual investor outreach involving interviews with over 60 institutional investors with an aggregate of $32 trillion under management.
According to EY, the top five investor priorities are:
Board composition, with a particular focus on enhanced diversity
According to the report, 82% of investors view board composition as a top priority. Currently, the focus is on diversity, with the goal of providing “fresh and different perspectives in the boardroom.” While gender diversity was most commonly cited, other forms of diversity may include race and ethnicity, age, nationality and geography and socio-economic backgrounds. About half of respondents reported that they consider board diversity in voting, while a quarter do so in the context of proxy contests and shareholder proposals. The driver appears to be the “interest in effective board composition, given the wide range of studies demonstrating the benefits of diversity, including how diverse perspectives enhance issue identification and problem-solving ability and impede ‘group think.’” Other issues were long tenure (which they define as over 10 to 12 years) and board assessment, refreshment and succession. EY reports that about 25% requested enhanced disclosure about board composition, such as showing how board member selection aligns with the company’s strategic goals or providing a meaningful skills matrix.
Board-level expertise that is more aligned with business goals
Over 90% of respondents identified at least one of these topics as an area that might be appropriate for enhanced board expertise—technology, industry, climate competency, risk oversight and strategy, with cybersecurity cited as the most common concern. About half also advocated strengthening industry expertise, including, a few suggested, by adding a non-independent director. Expertise in climate, environmental and social issues was recommended by 46% of respondents. EY observed that, while boards cannot be expected to master technical areas, they do need to be sufficiently informed to “oversee key company-specific priorities.” EY also advocated that it may be advisable to include in proxy statement disclosures a description of how board access to expertise is aligned with company strategy.
Increased attention to climate risk and the environment
Addressing climate risk and environmental sustainability, including topics such as resource use, greenhouse gas emissions reduction, carbon footprint or preparation for a low-carbon economy, was a priority for 64% of respondents. Of respondents, 79% agreed that “climate change is a ‘significant risk factor,’” and, EY noted, just since 2016, the percentage of investors citing climate change specifically as a priority has more than tripled. When asked to rank priorities in this regard, most investors identified enhanced reporting first, while others ranked changes to company strategy first. EY identified as potential topics for shareholder engagement company environmental policies and activities, including political spending and lobbying. It may make sense, EY suggests, to determine if key investors are supporters of particular frameworks, such as the SASB framework.
Enhanced attention to talent and human capital management
Human capital management comprises a wide range of topics such as attracting, retaining, training and engaging the entire range of the workforce, the relationship of company culture to hiring and retention, and diversity and inclusiveness. Examples presented by investors included issues such as addressing the changing definition of work for millennials, technology-driven displacement of workers, worker training and broader company efforts to address projected skills shortages. Hiring and retention of the best talent can be key to remaining competitive over the long term, and company culture can play a role. For example, EY reported that some investors indicated that “companies that are strongly identified with a culture of improving the environment or benefiting communities have an advantage in attracting top talent, demonstrating that people want to work in companies that have good corporate citizenship.”
Compensation that is more aligned with performance and strategy
Slightly over a third of investors cited executive compensation as a priority in 2018. Notwithstanding 90% overall approval for say-on-pay proposals, these investors expressed concern “about the rigor of performance incentive structures and the size of pay, with some investors noting that they vote against a significant proportion of Say-on-Pay proposals.” In some contexts, investors were looking at the relationship between pay practices and environmental and social considerations, long-term strategic priorities and the culture of integrity and accountability: these “investors noted that misaligned compensation incentives can affect a company’s risk culture and the ethical behavior and compliance culture of its people. Some investors shared that accounting for the impact of litigation costs in pay calculation considerations could be one method to enhance pay for performance alignment.” Another issue raised was the possible pay disparities related to gender, race or ethnicity as well as pay gaps among various groups of employees. Interestingly, EY reports that only a few investors raised the topic of CEO-employee pay ratio, with the focus there on managing internal communications with the employee population.