Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 301

5 key ways to better engagement with boards

Governance and shareholder engagement firm Morrow Sodali has released its fourth annual Global Institutional Investor Survey which includes feedback from a third of the world's assets under management representing $33 trillion gathered from 46 respondents, including several domestic funds.

The results confirm that 2019 will be another year of transformative change as investors step up engagement to better understand the alignment between board composition and business strategy, especially in the way the board oversees corporate culture and the 'tone from the top'.

Increasing role of non-financial factors

In light of the report from the Hayne Royal Commission, these findings reinforce the increasing importance of non-financial factors in assessing a company's performance and corporate behaviour.

Investors want to engage with boards regularly throughout the year and they also want more substantive information about board composition and business strategy. They want clearer explanations on governance and executive remuneration. They also want an integrated narrative that explains environmental, social and governance practices in terms of business risk and sustainable financial performance.

Many investors are moving away from box-ticking and compliance checklists which is good news for companies. It gives companies greater flexibility to explain policies in terms of their specific business conditions and strategic goals. But a deeper dive by investors into companies’ strategic decisions increases demands on the time and attention of directors, requires much greater transparency and needs to consider the continuous disclosure obligations.

Key survey findings

Five important issues raised by the results are:

1. The quality of a company’s governance policies and practices will play a pivotal role when investors make voting decisions

Asked to rank the importance of various factors that determine how they make voting decisions, 93% of respondents selected “governance policies and practices”, 72% selected “long-term business strategy”, 65% selected “the quality and completeness of the company’s communications” and 54% selected “environmental and social policies and practices.”

2. Investor focus on board engagement continues to increase

A whopping 87% of respondents indicated that “proactive and regular engagement with the board of directors” helps in their evaluation of a company’s culture, purpose and reputational risk. In addition, 72% selected “proactive and regular engagement with management.” Thoughtfully planned engagements have become critical, strategic initiatives. They help secure favourable votes and minimise threats of activism. Additional context on proactive engagement can be found in the responses to “What are your goals when engaging with listed companies and their directors?” with 67% seeking to understand the company’s business strategy and capital structure and to understand how the board oversees corporate culture and the tone at the top. Only 35% see engagement as a way for investors to proactively inform companies about their voting policies and investment philosophy.

3. Investors will increase their focus on board composition and accountability in 2019

The spotlight will continue to be on director competence and boardroom transparency. Respondents made clear that the “skills” (70%) and “independence” (67%) of directors are critical factors in their evaluation of individual board members. These results are reinforced by their response to diversity. Gender and ethnicity scored much lower in importance than “skills and qualifications” (89%) and “professional experience” (72%) as criteria for judging the diversity of a board’s composition. Investors also signalled their support for board evaluation, done either internally or with an external third-party assessment.

4. Companies can expect more focus on disclosure and increased dialogue around climate change 

85% of respondents said that they view climate change as the most important sustainability topic. This result is slightly different than responses to a previous question where, when asked to rank the importance of detailed disclosure on a list of topics, 83% wanted more detailed information about human capital management, while 76% wanted more detail on climate change. This result may indicate that currently more information is available on climate change than on human capital management. The challenge for both companies and institutional investors is to better understand and agree upon which metrics are relevant to a company’s long-term performance and agree on standards that permit comparability with its peers and within a specific industry.

5. An activist’s credible story focusing on long-term strategy is likely to attract investor support

Activism is on the increase both in Australia and internationally. But even so, activists need the support of their fellow shareholders to leverage their influence. In 2017 we identified that 57% of respondents would engage with activists when approached, and 43% would proactively approach activists. This year we sought to find out what are the issues that might trigger such a discussion. Whilst historically activists tended to rest their cases on financial restructuring and operational improvements, these days more strategic issues become common – for example M&A, capital allocation and other aspects of corporate strategy. It is therefore interesting to observe that institutional investors are most likely to support an activist with a credible story focused on long-term strategy (50%) and in cases where the target company has unclear business strategy (46%), misallocated capital (43%) or a lack of board accountability to shareholder concerns (41%). Strategic shareholder activism is now defined as an asset class. Activism is here to stay. The debate over whether activism creates or destroys value is now mainly a topic of interest to academics and regulators, while companies must adapt to the realities of a marketplace that encourages activism.

Looking ahead

The trends of increased investor engagement as well as deeper integration of ESG into the investment process are at an important juncture for equity capital markets; our survey highlights this with increasing conviction each year.

As asset owners demand greater transparency on how investment managers exercise their stewardship duties, not merely to attract investment returns but also increasingly to integrate ESG considerations into the investment decision making process, we observe the encouraging progress on this journey.

The change of pace around ESG integration, the continued rise of activism and recent corporate scandals all combine to create an ever-growing necessity for companies to keep abreast of the expectations and thinking of their Institutional Investors. Those who do this will observe that investors have shifted their focus from a company's compliance with corporate governance codes, to sustainability related principles that have impact beyond proxy voting to engagement strategies and investment decisions.

 

Maria Leftakis is CEO Australia at Morrow Sodali. To read the Morrow Sodali’s Global Institutional Investor Survey in full, click here.


 

Leave a Comment:

     

RELATED ARTICLES

Worries over the planned proxy rule changes in Australia

Why investment stewardship matters for long-term investors

Investor downside when management controls access to the board

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.