In discussion on critical board matters in 2014, investors express their need to better understand the quality of directors’ oversight
As shareholder engagement continues to take root as a best governance practice, investors are seeking increased context for the decisions that corporate boards are making.
That was a key point made in a gathering of 12 representatives from institutional investment outfits, convened by the National Association of Corporate Directors in late February, to discuss critical issues for board focus in 2014. NACD presented highlights of the meeting, whose participants included analysts and senior directors from TIAA-CREF, CalSTRS, T. Rowe Price, Vanguard, BlackRock and Fidelity, in a media conference call on April 1.
‘[Participants] said they are interested in a director’s perspective. What is the context? It helps them understand how connected, how knowledgeable [a director is and] at what level is that director’s oversight?’ NACD President and CEO Kenneth Daly explained during the conference call.
Investors are looking for more context not only regarding directors’ input concerning business strategy but about governance practices and board processes, added Robyn Bew, NACD’s research director.
Participants told NACD that for most companies that are performing well, effective engagement includes one meeting with major investors outside of proxy season where a broader range of issues can be addressed than the more narrowly focused meetings that occur during proxy season typically permit. Higher quality engagement is possible at off-season meetings, and providing a discussion agenda in advance enables investors to better prepare for these meetings and facilitates more robust conversations, participants said.
Investors are calling for more disclosure in places other than the quarterly documents that companies file with the SEC, including postings to corporate websites, videos about corporate practices and supplementary documents filed with the SEC.
While all disclosures of company information are welcome, investors said they’d like to see better targeted information in financial statements and SEC filings, which are often weighed down by technicalities and unnecessary complexity.
‘We don’t see a champion for reduction of disclosure complexity,’ Daly said.
Although executive compensation continues to be a concern worthy of discussion with corporate board members, some investors believe it tends to consume a large portion of engagement time, to the detriment of other critical governance matters. Despite their preference for discussing pay practices -- particularly the importance of appropriate alignment between pay and performance -- with independent directors rather than with senior executives or investor relations representatives, investors said they suspect that other key issues such as risk oversight and the board’s contribution to business strategy are comparatively underserved on engagement agendas as a result.
Investors also said they believe debates over ‘governance basics’ -- practices that ensure management and board accountability to shareholders such as majority voting and the right to call special meetings -- sometimes leave little room for other significant discussion topics. Investors want boards that haven’t implemented governance basics to address them, but they would like to avoid a ‘rehash of prior discussions’ that take away valuable time from other priority matters.
One point that NACD hadn’t heard in prior dialogues with investors was recognition that a company’s life-cycle stage significant impacts its governance structure, said Daly. Participants said they’d like to see small or newly public companies consider creating a plan to phase out some governance practices and adopt new ones over time that are more consistent with a mature stage of development. An example would be moving from staggered board elections to annual elections at a defined point in the future.
Board refreshment practices will also be a priority topic for investors this year, participants said. Diversity in board composition continues to be of interest to investors, but so are up-to-date skill sets that show directors are actively trying to respond to a changing world and the evolving pressures to which companies are subjected. One participant said that more heads of nominating and governance committees are likely to come under greater pressure this year.
