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

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Five stock recoveries not hanging on COVID predictions

The focus on predicting the recovery from the pandemic is the wrong emphasis. Better to identify great companies benefitting from market changes over a three- to five-year horizon with or without COVID.

Peak to peak, which LIC managers performed during COVID?

A comprehensive review of dozens of LICs shows how they performed in the crucial 'peak to peak' of COVID. This 14 months tested the mettle and strategies of a sector often under fire, with many strong results.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Blink and you missed a seismic shift in these stocks

Blink and it happened. If announcements in this sector were made by a producer of iron ore, gas, copper or some new tech, the news would have been splashed across the front pages. Have we witnessed a major change?

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Latest Updates

Shares

Platinum’s four guiding investment principles

Buying mispriced stocks is often uncomfortable when companies are outside the spotlight and markets are driven by emotions. And it's inescapable that the price paid ultimately determines the end result.

Interviews

Andrew Lockhart on corporate loans as an income alternative

Loans to corporates were the traditional domain of banks, but as investors look for income alternatives to term deposits, funds have combined hundreds of loans into a single structure to create a diversified investment.

Retirement

10 things I learned in my faux-retirement

Pre-retirees should ‘trial run’ their retirements. All those things you want to do - play golf, time with the family, a hobby, write a book - might not be so appealing in reality, but you might discover other benefits.

Retirement

Achieving a sufficient retirement income portfolio

Retirees require a reliable income stream to replace the wages they received when they were working and should focus on the dollar income generated over time rather than the headline yield percentage.

'Wealth of Experience' podcast and ASA webinar on ETFs v LICs

Peter reveals some top stock picks with an emphasis on long-term assets like Sydney Airport, Graham discusses spending in retirement and valuing assets, the key to Amazon, guest Andrew Lockhart and plenty more.

Strategy

Lucy Turnbull’s three lessons on leadership and successful careers

From promoting women to boost culture to taking opportunities as they arise, Lucy Turnbull AO says markets should not drive decision-making and leaders must live and breathe the company's mission and values.

Economy

Are concerns about inflation inflated?

While REITs and some value stocks are considered 'inflation-sensitive' assets, the data provide little support that they are good inflation hedges, and energy stocks and commodities are too volatile. So what works?

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.