Amy Borrus, executive director of the CII, talks good governance, shareholder initiatives, and why activist investors and boards are really on the same side.
The board is the cornerstone of the US model of corporate governance, and as a result CII has high expectations of corporate directors … We need to recognize how far governance practices and standards have improved, and we need to keep in mind that investors and directors are essentially aligned: Both want companies to be successful, for the long term.
Tanya Ott: Big investors have big expectations for corporate boards—and they’re being more and more vocal about what they want to see. What can we expect this year? We turned to a woman with the inside scoop.
Amy Borrus is the executive director of the Council of Institutional Investors.
Amy Borrus: For just over 35 years, CII has been a leading voice for good corporate governance, strong shareholder rights, and sensible financial regulation that we think foster fair, vibrant capital markets.
Tanya: CII’s members include pension funds, endowments, foundations …
Amy: All have long investment horizons and are heavy users of passive investment strategies, making them universal “forever owners.”
Tanya: And “forever owners” are, by definition, in it for the long haul. So these investors advocate good governance, strong shareholder rights, and policies that will keep companies stable and paying dividends for a very long time.
In addition to the core members, CII’s associate members include corporations, service providers, and many of the big asset managers—so they have a unique view into the minds of shareholders. That’s why Deloitte’s Center for Board Effectiveness invited Amy to address company directors about the issues that promised to be front and center during proxy season. She shared her insights on what sorts of shareholder proposals were likely to gain traction, why we’re seeing an uptick in shareholder activism, and what sorts of company activities may bring increased scrutiny. She started off by telling the directors to expect a lot of action.
Amy: The headline news is that 2021 is shaping up as another big year for shareholder initiatives on environmental and social issues. Shareholder support is trending higher, especially from mainstream asset managers so far this year.
Climate change, diversity, political lobbying spending—these issues continue to dominate on the environment and social area.
Tanya: Let’s take these in turn. First: Environmental initiatives.
Amy: There have been 136 shareholder proposals filed on climate change risk alone this year, and shareholders are voting in record numbers for climate-related environmental proposal and racked up majority votes—three climate proposals at big energy companies; that’s really a first.
One interesting variation on environmental proposals that we’re seeing this year, and what may be a new high watermark for environment proposals, is a read resolution filed by a social fund asking large chemical companies to report on their spills of plastic pellets that are released into the environment. At one company, that received 81% of votes.
They’re getting traction, in part, because of the pandemic and the interest in/focus on systemic risk generally, but also because of more focus on climate change and, as I said earlier, increasing pressure on large asset managers to step up on climate issues. And, lastly, just a more organized effort on the part of the proponents.
Tanya: Amy says that pressure on asset managers has led them to, in her words, “get religion.”
Amy: There has been a marked uptick in votes for shareholder proposals, especially climate-related proposals, and a greater willingness on the part of mainstream asset managers to vote against directors. That more activist bent, if you will, is likely to persist for some time. There’s no question that there’s ongoing pressure from socially responsible investors and from interest groups, for leading money managers to walk the talk.
Tanya: But not all climate policies are getting support. One notable exception: “Say on Climate” initiatives, which ask companies to not only publish their plans to address climate change, but also [to] give shareholders an opportunity to vote on those plans.
Amy: In the United States, there’s more skepticism about “Say on Climate,” and I don’t see any sign that that’ll change. It’s a European import and [the] United States asset owners and asset managers are very ambivalent about these, and are approaching them [on] a case-by-case basis. They’re highly skeptical, partly based on their experience with say-on-pay votes. “Say on Climate” throws it back on investors to do a deep dive into a company’s climate plan … This is just a heavy ask.
Tanya: Amy said another area that’s getting a lot of investor attention is diversity.
Amy: There’s no question there’s growing shareholder expectations around diversity in companies. It started, maybe five to 10 years ago, with focus on women on boards. But over time, the investor lens has widened beyond gender to encompass race and ethnicity, and beyond the board, to disclosure on diversity in the C-suite and now the workforce generally. Just look at all the proposals of requests for companies to disclose their EEO-1 reports. Shareholder proposals asking companies—mostly but not entirely in the financial sector—to do independent racial audits, or published reports assessing diversity and inclusion efforts, are also attracting significant support.
Tanya: But Amy says that there’s only so much a board of directors can do on the diversity issue.
Amy: Diversity isn’t just about recruitment. It’s also about making employees feel welcome and comfortable and that they can advance. That’s the harder part. It’s not the board’s responsibility to do that; it’s the board’s responsibility to make sure that management has the processes and the approaches in place to hire and retain and develop the best workforce, the best talent pool it can. So those other pieces of retention and training and responsiveness are really important.
Tanya: In fact, human capital concerns as a whole are showing up on some shareholders’ radar.
Amy: This has been highlighted, obviously, by the pandemic and concerns about worker safety and health. We saw an announcement about large companies funding efforts on child care because so many women will burn out of the workforce, or felt they couldn’t stay working because they’re taking care of kids.
Tanya: But information on human capital concerns can be hard to come by.
Amy: Things like number of employees; turnover rates; how many employees are full-time, part-time, or contingent; the diversity of workforce; the total labor spend—just the basics. Investors don’t even have the basics yet.
Just a handful of investors are most active on this issue. Really they’re just talking about a handful of metrics that companies probably already have at their fingertips, that would not be difficult to disclose—they’re gathering this information anyway.
Tanya: Those metrics become even more relevant when we consider the next area of shareholder interest: Executive compensation.
Amy: Early voting suggests that shareholders are scrutinizing executive compensation more closely this year. Semler Brossi reported that the failure rate—the rate of fail to receive 50% support—is running about 3.3%. That’s well above 1.9% failure rate for these proposals at the same time last year. Twenty-two Russell 3,000 companies have failed to win majority support for say-on-pay proposals; at least six of those are S&P 500 companies.
In many instances, pay backlashes this year stem from bonus plan changes designed to help executives secure hefty bonuses during the pandemic stock-market slump over a year ago, and a perceived failure to provide a compelling rationale for doing that. The Financial Times reported that more than 100 S&P 500 companies have rewritten bonus plans for executives as a result of the pandemic. Some companies simply eliminated the second quarter of 2020 from performance targets, making it much easier for CEOs to achieve bigger bonuses. It has not gone unnoticed by investors that adjustments and discretion are almost always upward: Bonuses are not reined in when companies benefit from positive market forces outside the executives’ control. You have to recognize that in some companies, more negative votes have partly been a reaction to rising pay for CEOs in the midst of layoffs and other hardships for mainstream employees during COVID[-19].
Tanya: The final area for shareholder involvement: Governance proposals.
Amy: Eighteen have won majority support. They tend to be standard mainstream proposals seeking declassification of the board, majority voting and director elections, the right to call special meetings. These are all rights most institutional investors regard as settled matters. Public companies shouldn’t be clinging to staggered boards or early voting in the year 2021, according to most investors.
Tanya: Amy said that only some companies face this sort of enhanced scrutiny and activism from investors on issues like climate change and diversity.
Amy: Investors who are active on these issues tend to focus on S&P 500 companies because it’s the largest chunk in the portfolio. These are brand names—well-known companies get more attention in the media, and so, unfortunately, small- and mid-cap companies don’t get asked as much.
I became aware of this when I was asked to speak at [a] luncheon event. I was sitting next to the corporate secretary for a midsize furniture maker, a public company, and [we] got to talking. This company still didn’t have majority voting for directors, [and he said], “That’s a great idea.” I said, “Well, why haven’t you changed?” He said, “None of our shareholders asked us.” And that’s too bad; investors haven’t paid enough attention to small- and mid-cap companies.
Tanya: But Amy said in some cases, small- and mid-cap companies are designed to minimize shareholder input.
Amy: When you have IPO companies, particularly those high-tech companies, unicorn companies where there’s a lot of perceived promise, founders want as much control as possible. The gatekeepers, the investment bankers, and lawyers who help them go public, are only too willing to give it to them, and that includes not just dual class stock, it includes supermajority vote requirements and staggered boards and the rest of it. Once you have supermajority requirements, it’s really tough to change by-laws later on.
Tanya: CII doesn’t just concentrate on boards themselves—it also keeps an eye on the SEC. The No. 1 priority there is consistency.
Amy: At CII, we think the ideal approach to regulations is a mix of both principles and rules-based, and I do think that this SEC, you’ll see more of an emphasis on rules. That’s in part because investors—and, to a certain, extent companies—want standardized metrics. Gary Gensler, the [new] SEC chair, at his nomination hearing and [when he] testified on the Hill, he kept repeating, “Consistent, comparable information.” Investors need consistent, comparable information, and you don’t get that from a sustainability report. That’s narrative. That doesn’t help you compare companies peer to peer. For companies, frankly, it leaves you open to continuing to get different questionnaires from different investors about different information that you’re supposed to provide, instead of a standardized format. I do think we’ll see the SEC propose [a] standardized requirement for disclosure of climate and human capital metrics in some sort of standard format.
Tanya: Amy says CII will continue to focus on good governance practices.
Amy: Good governance doesn’t guarantee good performance, and poor governance doesn’t guarantee poor performance. We tend to think of it like, “Good fences make good neighbors.” Good governance helps to deter bad behavior and improves behavior [overall].
We need to recognize how far governance practices and standards have improved, and we need to keep in mind that investors and directors are essentially aligned: Both want companies to be successful, for the long term.
Tanya: Amy Borrus is executive director of the Council of Institutional Investors. She was addressing directors in a meeting hosted by Deloitte’s Center for Board Effectiveness. You can find more articles on board practices on Deloitte Insights.
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I’m Tanya Ott. Thanks for listening and have a great day.
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