Following the 2019 proxy season, the world’s largest asset managers shared the results of their engagements on corporate strategy, board composition, risk oversight, and compensation and culture.
While the annual stewardship reports from the world’s largest asset managers—BlackRock, Vanguard, and State Street Global Advisors (SSGA)—are intended to update clients on their engagement activities throughout the year, they can also provide valuable insights for public company boards on their agendas and expectations for engagement.
Gender diversity and board composition continue to be critical, as highlighted by State Street Global Advisors’ “Fearless Girl” campaign, which focused on adding at least one female director to the boards of Russell 3000 companies. At the end of 2018, 17 percent of R3000 companies lacked a woman director, compared to 24 percent at the end of 2016.
Overboarding, particularly for named executive officers, remained a focus in 2019. BlackRock, for example, voted against 94 individual CEOs “on the basis of overcommitment.”
Engagements related to the board’s role in strategy development and oversight have merged into discussions on long-term value creation. BlackRock reported that roughly 46 percent of its engagements in the past year touched upon strategy, with about one third involving multiple meetings.
Vanguard tries to “assess how deeply the board understands the company’s strategy and is involved in identifying and governing material risks.” According to its stewardship report, “If a company’s practices, organizational culture, or products put people’s health, safety, or dignity at risk, they can pose a financial risk to investors too.”
State Street Global Advisors (SSGA), which selects particular sectors on a rotating basis for a deeper dive, indicated that this year’s focus would be on global systemically important financial institutions (SIFIs) and large regional banks, communications services, and agriculture and forestry. SSGA also indicated a focus on assessing companies’ approach to sustainability and alignment with environmental, social, and governance (ESG) issues as well as the disclosure of the financial materiality of sustainability issues.
As the scope of the compensation committee expands to include a broader look at workplace incentives and culture, these asset managers are increasing their scrutiny of pay packages. “Over time, we have seen companies structure incentive plans that seem more consistent with rewarding long-term performance,” BlackRock’s report states. For pay plans with low support, BlackRock generally discusses “limiting one-off grants and disclosing more detail on the performance metrics.” BlackRock also voted against 14 percent of equity pay plans overall, but 24 percent of pay plans at small capitalization companies.
Vanguard voted against 585 compensation committee members (globally) for failing to act in response to shareholder feedback. Meanwhile, SSGA observed items such as education reimbursement and training programs being increasingly used by U.S. companies for talent retention. It is also looking at how compensation decisions are impacting gender diversity and pay parity and disclosure on pay disparity and workforce diversity by level, including related goals and strategies.
BlackRock enumerated six topics for boards to consider regarding oversight of human capital management (HCM), including linking HCM performance to executive compensation, the integration of HCM risks into risk management processes, and ensuring that diversity and inclusion are considered in all aspects of human capital decisions.
Large investors, individually and collectively, in 2019 have become more vocal regarding their expectations of a company’s ESG profile and related risks. In the United States, these managers are encouraging the use of disclosures in accordance with the Sustainability Accounting Standards Board (SASB) and the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD) frameworks. BlackRock reported limited support for most environmental and social shareholder proposals that “are often poorly constructed, largely U.S.-centric, and encourage inconsistent reporting that impedes comparability across different sectors and markets.”
SSGA observes that “investors view climate change as an issue that needs to be addressed urgently in a long-term strategic manner, while boards see climate change as an operational risk to be mitigated…. When boards approach climate change in a more systematic manner, a natural outcome is the incorporation of climate risks and opportunities into long-term strategy. This will require boards to apply a climate lens to capital allocation and nonorganic growth strategies, such as mergers and acquisitions.”
Vanguard engaged with more than 250 companies in carbon-intensive industries and observed companies in the energy industry making progress on disclosure and board education related to climate risk.