Gender diversity, climate change and regulatory uncertainty on investors’ minds

Diversity is one of the top five issues investors are considering ahead of the 2017 proxy season, according to research from the EY Center for Board Matters. 

In fact, of the more than 50 institutional investors surveyed by EY, representing $24 tn in assets under management, 70 percent say board composition should be a priority in 2017. For just over half of the investors EY spoke with, board diversity – and particularly gender diversity – should be top of mind for boards this coming proxy season. 

‘While racial and ethnic diversity is certainly a component of investor interest, for now gender diversity is the primary focus for many – in large part due to the lack of disclosure on racial diversity and the prevalence of gender data and resources,’ notes EY. Across the US, gender diversity in the boardroom ‘continues to advance at a sluggish pace,’ EY adds. 

The proportion of women-held directorships among S&P 1500 companies grew by just 1 percent last year, explains EY, with less than a fifth (18 percent) of those directorships now held by women. ‘This growth is the same rate as each of the past five years – suggesting that parity will not be reached for more than 30 years,’ says EY.

Other key issues investors feel should be a priority for boards this coming proxy season include climate change, cited by close to a third of the investors surveyed by EY; regulatory and legislative uncertainty under the new administration; executive pay, cited by just over a third of respondents; and short-termism, with 70 percent of investors answering ‘yes’ to the question, ‘Do you think there is a problem with short-termism in the marketplace?’

A ‘growing number of investors now recognize environmental and social risks as being linked to long-term financial risks,’ says EY. In fact, the near one third of investors the firm spoke to that feel climate change should be a board priority in 2017 is more than double the number of investors that said so last year.

EY says it expects a rise in shareholder proposals related to climate risk, ‘which have been receiving increasing support in recent years, averaging 29 percent support last year, up from just 7 percent in 2011.’

On the issue of regulatory and legislative uncertainty, EY’s conversations with investors highlight three areas of concern: 

• Legislative proposals that could impact the governance landscape
• Backsliding on US environmental regulations and climate change commitments
• Repeal of certain shareholder protections and governance provisions.

Some investors, however, say regulatory uncertainty does not impact them ‘because they recognize their ability to effect change across the market through their own engagement and proxy voting practices, regardless of the regulatory climate.’

When it comes to executive pay, many investors show frustration with ‘perverse incentives that may not align with the company’s culture and purpose’, with executive pay clawback policies once again hitting the spotlight, notes EY.

The final key area of concern going into the 2017 proxy season is short-termism. As part of its research, EY asked investors how they assess whether companies are sufficiently long-term-focused. The factors they consider include: 

• The company’s long-term strategy narrative. Investors want the long-term vision as well as the short and mid-term goals that lead to that vision
• Executive pay incentives, especially changes to performance targets. Red flags include companies setting out long-term pay structures only to change pay targets to get short-term gains, ‘which creates pay volatility,’ notes EY
• Capital allocation, to see whether capital expenditures are ‘enabling long-term strategy’
• ESG factors, as they tend to have a longer time horizon.