It’s been long understood that asset owners are driving changing behaviours in corporate governance, said Donna Anderson, head of corporate governance in the U.S. equity division at T. Rowe Price Group Inc., speaking at the Canadian Investment Review’s Plan Sponsor Exchange conference in February.
One example, she noted, is the tremendous influence of Japan’s Government Pension Investment Fund. For instance, since its chief investment officer decided to make environmental, social and governance considerations a priority, the landscape hasn’t stopped shifting. “It’s everything from enforcing ESG integration within the Japanese investment community and then, once we all caught our breath from that, they moved onto reporting — so asset managers reporting back to asset owners.”
The GPIF has been such a strong force that it has “single-handedly created a new reporting standard,” she added.
Currently, the fund is taking on the issue of how share-lending programs conflict with stewardship duties, which is starting a lot of dialogue. It’s also looking into index construction and the potential exclusion of certain companies that aren’t sufficiently environmentally aware. “I think that’s really something to watch and obviously having massive repercussions in our space,” Anderson said.
Asset owners are also making a difference closer to home. In the United States, for instance, labour funds and pension funds in the medical industry are joining forces to tackle the opioid crisis.
While it’s easier for large funds to make a difference, smaller pension plans can also enact change when working in co-ordinated ways, she said. Canada, for instance, has been a very co-ordinated market, while asset owners in some other markets aren’t as co-ordinated. “They’ve been chasing different issues. And the idea is, by coalescing, they’re actually being able to make a much bigger impact on select issues.”
One point to note is that private companies have a different corporate governance standard than public companies, said Anderson. “Private companies in this space, especially growing private companies, can get away with a lot more than your average listed company.”
A reason for this, she suggested, is the transparency required in the U.S. around how shareholders vote on public company proxy votes. “That has created a system of checks and balances and pressures when asset managers are ‘too friendly’ or ‘too light’ on something. We get evaluated, for instance, on how we vote on compensation or shareholder proposals.”
On the flip side, there are no shareholder rights in private companies. “They pass everything by written consent. Frankly, it just means that you don’t have to disclose to all your investors.”
Another shift in the corporate governance landscape is the increasing complexity of the work of boards, with international companies facing huge amounts of trade issues, tax disputes and privacy disputes in various jurisdictions, said Anderson. “The idea that these companies need their own foreign policies is really taking hold and we just don’t see boards are equipped for that level of complexity and sophistication.”
Shareholders can do a lot from the outside, such as focusing on board composition, but they aren’t in the boardroom at the end of the day. “It’s very hard to judge on the outside, which is why I think, honestly, we recognize it when it fails. You can see all these cultural and board failures taking place and that’s sometimes your first sign that they weren’t equipped.”
While investors are still not well-placed to have influence on selecting board members, there’s a big focus on the evaluation process, she said. “There’s a lot of investor focus and a lot of better disclosure about what process boards are undergoing to do the re-nominations.”
As well, she noted, investors can focus on diversity and board tenure. “By focusing on tenure and diversity, we are actually increasing the amount of turnover in board rooms — especially in small mid-cap land in some markets — and I think that is helpful.”