Proxy Season 2018 Likely Defined By Board Accountability

proxyWith annual meeting season set to begin in earnest in the coming weeks, the contours of the 2018 proxy season are coming into focus. While previous proxy seasons have had defining initiatives—“Say on Pay” in 2011, proxy access in 2015 and 2016 and majority support for climate change resolutions last year—2018 is likely to be defined by board accountability.

From board diversity and employee gender pay equity to corporate cul­ture and the environment, investors are signaling through public communication, engagement and votes that their priorities for generating long-term value creation are expanding beyond traditional com­pensation and governance topics. Plus, they’re more willing than ever to hold companies—and directors—accountable for failing to respond to their concerns.

Proxy season in 2018 will be a mark­er of how quickly investor expectations of companies and boards have changed over just the past few years. A decade ago, topics such as climate risk oversight and board diversity were considered the purview of management by the vast ma­jority of investors. In recent years, these issues have emerged as primary topics of engagement—and today, they are litmus test issues for the largest investors in the world.

Look for 2018 to bring to the fore continued investor focus on holding man­agement and directors accountable for implementing an agenda that comports with the new and growing expectations of their investors on environmental, social and governance issues.

“Top of mind for many investors this year will be board oversight of topics like sustainability and cybersecurity, as well as company culture.”

Expanding Investor Priorities

Over the past several years, major insti­tutional investors have steadily expanded their engagement efforts and grown their investment stewardship teams. Today, with nearly three-quarters of S&P 500 compa­nies reporting engagement with investors, dialogue between companies and their biggest shareholders is more robust.

Top of mind for many investors this year will be board oversight of topics like sustainability and cybersecurity, as well as company culture, including the board’s role in ensuring the workplace is free from sexual harassment and discrimination. Many boards have taken steps to increase transparency about their oversight of these topics, but issuers should expect increased scrutiny on their practices as societal expectations of corporate re­sponsibility shift and workplace dynamics continue to evolve.

Diversity and Gender Pay Equity

Board diversity and gender pay equity will also be long-term value creation priorities for investors in 2018. Board diversity has become perhaps the most resonant topic across the investor community, with major institutional investors touting their votes against directors and reporting success in forcing change at many companies. Ac­cording to Bloomberg, there are now just 47 Russell 1000 boards with no women, down from 176 in 2009. In 2018, Black­Rock, State Street and Vanguard have all signaled that they will build on their stated policies from prior years with plans to vote against boards without gender diversity.

New voting policies put in place by ISS and Glass Lewis will, respectively, flag or recommend voting against boards with­out female members in coming years. This will only increase the pressure on compa­nies to add diverse directors. A growing number of company targets of gender pay gap campaigns have released data following a wave of shareholder proposals in 2017 and 2018. New requirements in the UK will also spur additional disclosure on the topic. Expect more companies to make commitments to disclose and close their gender pay gap in the coming months.

Sustainability

Investors will also be pushing for com­panies to link sustainability and perfor­mance to business strategy and corporate citizenship. The momentum gained in 2017 from majority-supported climate risk shareholder proposals is likely to acceler­ate in 2018. Proxy Preview reports that 80 resolutions asking companies to address and provide additional disclosure on cli­mate change risks were filed in 2018.

Evidence that a range of sustainability issues will be an ongoing priority can be found in BlackRock Chairman and CEO Larry Fink’s annual letter to CEOs, which called for companies to deliver both finan­cial and social value. One recent exam­ple of how this new focus on corporate citizenship may translate to engagement and voting decisions can be found in the investor response to the recent school shooting in Parkland, Florida. BlackRock’s public statement on the topic outlined its intent to address the issue of firearms companies in index portfolios. It also included a series of questions BlackRock is proactively raising in engagement, in addition to the possibility of votes against specific directors or management pro­posals if a company’s response is deemed insufficient.

The push for companies to be responsive to investors is increasingly falling on the shoulders of directors. Proxy disclosure around board composition and evaluation practices, in particular, will be closely scru­tinized by investors seeking to understand how the qualifications and attributes of directors are tied to overseeing long-term company strategy. Initiatives such as the New York City Comptroller’s Boardroom Accountability Project 2.0 (reported on in CBM’s Q1 2018 cover story) have spurred enhanced disclosure about director attri­butes and skills from several companies.

In 2018, investors’ expectation that boards will address public policy priorities alongside strategic business goals will drive home the value of directors who can help set the tone at the top.

Abe M. Friedman is the CEO and a founder of CamberView Partners. Before founding CamberView, Friedman was managing director and global head of corporate governance and responsible investment at BlackRock, served as global head of corporate governance at Barclays Global Investors and was a founder of Glass Lewis. Bob McCormick is a partner at CamberView Partners. Before joining CamberView, McCormick served as chief policy officer of Glass Lewis, leading the firm’s engagement efforts and overseeing proxy voting. Prior to that, he was director of investment proxy research at Fidelity Investments.