Lessons from 2019’s proxy voting season

Institutional investors are focusing on board diversity and an increased clarity of communication with their portfolio companies, according to a new report by EY.

The report, which examined investor activities during the 2019 proxy-voting season, found institutional investor pressure on companies to increase the gender diversity of their boards is beginning to take effect. As well, legislative actions in some U.S. states are adding to the pressure.

“Against this backdrop, women are joining boards at a faster pace, all-male boards are disappearing among the largest companies and more investors are demonstrating their board diversity views through proxy voting,” the report said.

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It also found the rate at which women are achieving directorship roles has doubled. From 2013 to 2017, the rate has increased by one percentage point per year. In 2018 and 2019, it rose to two percentage points, for a total of 23 per cent female directors in U.S. companies. Should that rate continue, gender parity on directorship roles could reach parity by 2033 among the S&P 1500, noted the report. Further, all-male boards are now practically non-existent, making up less than one per cent of companies on the S&P 500.

The report also found institutional investors want companies to improve their disclosure of diversity along racial or ethnic lines. When assessing boards with publicly available information, it’s easier to tell whether members are male or female, but far more difficult to assess racial diversity, according to the report, which noted companies are beginning to respond to this concern, with many explicitly disclosing diversity information across board and directorial levels.

“Investors remain focused on whether boards have a diversity of skills and experience that align to the company’s evolving strategy and risk profile,” the report said.

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In addition to better communication, institutional investors also want to see more companies use the proxy to enhance the disclosure of their efforts on sustainability and good corporate citizenship. “Most leading companies now use the proxy to highlight the company’s approach to environmental sustainability, people and culture, community investment and social impact,” said the report.

In general, it found companies’ engagement with investors is becoming all the more standard. “Companies undertaking engagement should work toward anticipating and meeting investors’ evolving expectations for maximizing the value and productivity of these meetings.”

In the U.S., the regulatory landscape for investors’ involvement through engagement is in flux. Next year, the U.S. Securities and Exchange Commission will be considering making alterations to current rules, potentially changing which investors are allowed to take certain engagement actions. “It is generally expected that any changes will increase the current ownership and resubmission thresholds,” the report noted. “In the meantime, the shareholder proposal landscape continues to evolve.”

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Concurrently, shareholder actions on environmental and social issues are on the rise. “The portion of these proposals reaching key support thresholds also continues to grow,” the report said. “So far, nearly half of the environmental and social shareholder proposals that have gone to a vote have secured at least 30 per cent support, and 19 per cent have attained at least 40 per cent support.

“Thirty per cent support is the level at which many boards take note of a proposal topic and, at 50 per cent support, if the board is deemed to take insufficient action in response, many investors will consider voting against incumbent directors at the next annual meeting.”