Survey highlights growing investor pressure on governance teams

New research underlines the increasing pressure on companies – and in turn their governance teams – to respond to demands from investors with effective engagement, disclosure and policies on an ever-broader array of topics, including human capital.

Eighty-five percent of investors polled by Morrow Sodali say climate change will be the most-prioritized sustainability topic of their corporate engagements in 2019 – up 31 percentage points from last year and 35 percentage points since 2017. Morrow Sodali consulted senior governance specialists at 46 global institutional investors that manage a combined $33 trillion in assets under management.

At the same time, 54 percent of investors say human capital management will be a key engagement topic this year, an increase of 30 percentage points on 2018. Fifty-four percent also point to corporate culture. Other ‘sustainability’ issues on the agenda for respondents are cyber-security, sustainability development goals metrics, supply chain management and data privacy protection.

As the survey suggests, a number of governance professionals point to human capital – which covers a broad range of issues, ranging from workforce diversity, hiring and firing practices, fair pay and opportunities for advancement to safety and community concerns – as taking center stage this year.

With this in mind, Morrow Sodali chair John Wilcox tells Corporate Secretary that developments such as the #MeToo movement highlight how impactful human capital issues can be on the well-being of companies if, say, a CEO is implicated in bad behavior. There is, therefore, a heightened need to think about succession planning, even though it can be a difficult topic to address because a CEO may not wish to discuss it, he notes.

Taken as a whole, the focus on human capital marks a ‘recognition of the fact that companies are human enterprises’ and have an impact on those around them, Wilcox says. This is a profound shift from traditional views of the role of companies, he adds.

The increasing and diversifying expectations of investors are placing greater demands on governance teams, which must go beyond simply ensuring compliance, Wilcox notes. In response, teams need to ‘think and communicate differently,’ he says, which means they need to:

• Think about how big-picture issues may affect the company
• Educate the board on these and other, sometimes non-financial, matters
• Prepare the board to take part in roadshows and AGMs
• Make corporate reporting responsive to investor wishes.

Executive pay continues to be an important consideration for investors, even as support for say-on-pay resolutions remains generally high: 65 percent of investors say pay-for-performance is the most important consideration when evaluating executive pay, although this is down 23 percentage points from 2018. Meanwhile, the importance of companies applying rigorous performance targets has risen by 10 percentage points over last year, from 46 percent to 56 percent.

When asked to rank factors that determine how they make voting decisions, 93 percent of investors in the survey point to governance policies and practices as the most important. The second-ranked consideration is the company’s long-term business strategy (72 percent say it is highly important), followed by the quality and completeness of the company’s communications (65 percent) then environmental and social policies and practices (54 percent). Financial performance ranks last, with just 48 percent of respondents saying it is key when voting.

Among other things, the survey finds that ESG and non-financial risk factors are rapidly being integrated into investment/divestment decision-making processes for all asset classes. Sixty-eight percent of investors – a rise of 19 percentage points from last year – integrate non-financial factors across all asset classes. Thirty percent of respondents say they are still in the integration process and just 2 percent say they have not included the assessment of non-financial ESG factors into their investment decisions.