Dis 29
Tags: Board composition, Boards of Directors, Brazil, Cybersecurity, Diversity, ESG, EU, Europe, Executive
Compensation, India, Institutional Investors, International governance, Japan, Shareholder activism, Stewardship
More from: Anthony Goodman, Melissa Martin, Rusty O'Kelley, Russell Reynolds
Editor's Note: Rusty O’Kelley III is the Global Head of the Board Consulting and Effectiveness Practice, Anthony
Goodman is a member of the Board Consulting and Effectiveness Practice, and Melissa Martin is a Board and CEO
Advisory Group Specialist in the Washington, D.C. office of Russell Reynolds Associates. This post is based on a Russell Reynolds publication by Mr. O’Kelley, Mr. Goodman, and Ms. Martin.
At the end of each year, Russell Reynolds Associates interviews over 30 institutional and activist investors, pension fund managers, public company directors, proxy advisors, and other corporate governance professionals in five key markets
regarding the trends and challenges that public company boards will face in the following year.
Across all of our interviews this year, an overriding theme was the importance of board quality and composition—and the components that go into both. Investors of all types (including institutional and activist) are continuing to ratchet up their
focus on the quality of a company’s board of directors, both collectively and individually. The focus on quality and composition is even greater than in previous years. Investors are motivated to hold boards accountable for company performance and are willing to take action to ensure that boards are meeting governance standards. Governance
expectations continue to rise across markets and industries. Investors and proxy advisors are relying on traditional metrics (e.g., tenure, overboarding) to assess board quality, but a number of investors have talked about needing to have greater
insights into the board to assess quality.
Based on the events that have unfolded in 2017, it is likely that the world’s largest investors also will pay closer attention to cybersecurity, climate change risk, and corporate culture in 2018. This may require boards to revisit their approaches to risk oversight, including broadening their perspectives on what constitutes risk management and is therefore within the
scope of a board’s oversight responsibilities.
Based on our interviews and research, we see seven key global trends in governance of which directors should be aware.
Better Investor Stewardship: An enhanced interest in investor stewardship by governments and investors is impacting corporate governance globally. Since the last financial crisis, there has been a drive for more investor accountability in how they use their influence and votes to steer the strategic direction of investee companies. This
has combined with a dramatic increase in the popularity of, and cash flows into, index tracking funds, which have increased the voting power of the major asset managers. In 2017, the top five global asset managers controlled over $8.2 trillion of equity investments and that number continues to grow. A consequence of the emphasis on
stewardship is that many of the world’s largest institutional investors are expanding the staff and resources dedicated to engaging with investee companies and proxy voting.
1.
Board Quality & Composition: Institutional investors will continue to prioritize gender diversity, director skills and experiences, composition refreshment, and the appointment of directors who have enough time to dedicate to the company as key indicators of board quality. Boards and nominating and governance committees in certain markets
2.
Posted by Rusty O'Kelley III, Anthony Goodman, and Melissa Martin, Russell Reynolds Associates, on Friday, December 29, 2017
Global and Regional Trends in Corporate Governance for 2018 https://corpgov.law.harvard.edu/2017/12/29/global-and-regional-trends-i...
should expect increased votes against directors where there are fewer than two women on the board. Activists and some institutional investors will pay close attention to the number of directors with direct industry experience when
assessing composition and quality.
Compensation: Executive pay will continue to remain in the spotlight as investors are looking for additional
engagement and/or disclosure around total compensation and its link to long-term strategic goals and business performance. Boards and compensation committees should expect more inquiries related to incentive compensation schemes and how they drive desired employee behavior.
3.
Activist Investing: Many boards often feel trapped between what appear to be competing demands: Institutional investors want to see long-term shareholder value creation, and activist investors often call for short-term value
enhancement. The companies that have had the most success navigating activist campaigns have been the ones with boards that are willing to have a meaningful dialogue with activists to achieve a resolution. Boards that fight with activists will face intense scrutiny of the value-creation history of each director, both in their executive and
board careers.
4.
Environmental, Social, & Governance Risk: While climate change risk and sustainability have been emerging
areas of focus for several years, investors now consider the topics to be mainstream priorities. Though companies in extractive industries are likely to receive the greatest levels of scrutiny, other sectors will also see more engagement from institutional investors. Guidance laid out by the Financial Stability Board Task Force on Climate-
related Financial Disclosures (TCFD) will lead to a greater investor focus on recommendations, such as the use of two-degree scenario planning to prepare for the Paris Accord goal of minimizing global temperature increase to two degrees Celsius. Under a two-degree analysis, companies assess the risks and opportunities of climate change on
the business.
5.
Cybersecurity: Cyber risk continues to be a growing concern for global investors in light of multiple security
breaches (in the political, government, private sector, and consumer spheres) worldwide. Cyber threats will be an important area of focus for boards to monitor. Many institutional investors will use 2018 to formulate their policies on cyber risk and the role of the board, leading to further engagement on this topic.
6.
Human Capital: Institutional investors are increasing their focus on human capital. There are various aspects to their interest, including effective succession planning at the C-suite level and beyond, the impact of company
culture on performance, and gender pay disparity.
7.
In our full whitepaper, we explore these trends and their implications in more detail across five key markets: the United States, the European Union, Japan, India, and Brazil. Abbreviated highlights for each region and country include:
With the Trump Administration’s deregulation agenda and a lack of congressional action, we expect increased investor
engagement with companies and the private ordering of governance changes to continue. U.S. boards can anticipate continuing pressure from investors to enhance disclosures regarding board composition, climate change risk, and
cybersecurity.
Investors remain focused on improving board quality and want more insight into the composition of the board. The New York City Pension Funds’ Boardroom Accountability Project 2.0 will continue to put a spotlight on enhanced disclosure of board composition through the request for disclosure of a formal board matrix. Though most large
institutional investors are unlikely to be as prescriptive, they do want to see greater insights into why a director is on a board and the skills he or she brings. Boards should consider how they can improve the narrative around their current board composition and the link to the company strategy, as well as their plans for refreshment.
Several large institutional investors, including State Street Global Advisors (SSGA) have reached the limit of their patience on the lack of gender diversity in boardrooms. These investors are now willing to vote against either the
chair or the entire nominating committee of companies with either no or only one female director if they have previously attempted to secure change at these companies through engagement.
Global and Regional Trends in Corporate Governance for 2018 https://corpgov.law.harvard.edu/2017/12/29/global-and-regional-trends-i...
Most investors continue to prefer boards to conduct a rigorous evaluation to encourage refreshment, rather than implement blunt age or tenure limits. Investors are reluctant to prescribe the specific manner of evaluation and
expect companies to “demonstrate they have the right board to move the company forward.” Investors would like to see more detail on the evaluation process disclosed in the proxy, as is common in much of Europe.
Activist investors will continue to influence board decision-making, process, and composition. Expect an increased level of scrutiny of an individual director’s track record of value creation and industry expertise. Activists will further magnify CEO compensation and pay disparity (against other named executive officers) as they benchmark against
peer companies. They use this analysis as a potential flag around company culture and as a signal of an “imperial CEO.”
Investors continue to promote the relevance of climate change and broader sustainability risks and opportunities as an area of focus. There is a drive toward comparability of disclosures, with institutional investors voicing support for the roadmap laid out by the TCFD guidelines cited earlier. Boards are expected to understand climate risk, but
there is as yet no expectation that they will appoint climate change experts to the board.
Cyber risk continues to be a major concern. Investors are less interested in adding specific expertise in the form of
a single new director but would prefer a cyber-competent board overall. We expect to see more guidance on this from investors next year.
Global and Regional Trends in Corporate Governance for 2018 https://corpgov.law.harvard.edu/2017/12/29/global-and-regional-trends-i...