Investors unite behind common governance principles, finds EY

The 2017 proxy season has seen proxy access go mainstream, diversity and gender pay gaps emerge as key themes and calls for non-voting shares to be banned, but EY says it’s ‘the launch of a historic US stewardship code’ that has marked the season.

While common in many markets, the voluntary Framework for US Stewardship and Governance – launched in January 2017 and coming into effect January 2018 – is the first of its kind in the US. According to the EY Center for Board Matters’ 2017 proxy season review, 38 US and international investors, with an aggregate of more than $20 tn invested in the US equity markets, are now signatories.

‘The framework unites some of the world’s largest investors behind key corporate governance principles for US-listed companies,’ write the review authors. ‘As a result, companies may face increased pressure to come in line with leading practices related to board accountability to shareholders, shareholder voting rights, board leadership structures, board effectiveness practices, and the alignment of pay with long-term strategy.’

EY says the framework shows that ‘key investors are not blindly following the recommendations of proxy advisory firms’ and may signal a time of ‘increased investor engagement and transparency around corporate governance.’

But what might investors be looking to talk to companies about? EY highlights four other trends or areas of interest from the 2017 proxy season:

1. Proxy access is now mainstream among large companies. The once controversial shareholder tool – one that EY points out firms fought against for decades – is now the norm, with 60 percent of S&P 500 companies having proxy bylaws in place, up from less than 1 percent in 2014. At the time of writing, however, EY adds that ‘investors have yet to use this new board accountability tool’, with many insisting it remains a last resort.

2. Diversity and the gender pay gap. Diversity – with a particular focus on gender – is another area investors have been focused on in 2017. This should be a board priority, say more than half of the 55 investors that EY spoke to ahead of the proxy season. In fact, ‘proposals asking boards to report on and increase their board diversity are among the top shareholder proposals submitted this year,’ notes the report, while ‘as of 2016, only 18 percent of S&P 1500 directorships were held by women.’

3. Sustainability – and particularly climate risk – continues to hold the spotlight. The integration of environmental risks and opportunities into a company’s strategic planning is increasingly being seen as an indicator of how that company is positioned and prepared for the long term, points out EY, citing BlackRock and State Street’s announcements that ‘climate risk will be a focus of their company engagements this year’.

Climate change was considered a board priority by almost a third of the investors EY spoke to ahead of proxy season, while ‘support for shareholder proposals requesting that companies report on how they are assessing climate risk has climbed from 7 percent in 2011 to 43 percent so far in 2017.' In what EY describes as ‘a historic shift’, so far this year three of the proposals secured majority support for the first time, including two at energy companies – ExxonMobil and Occidental Petroleum – that exceeded 60 percent support.

4. Unequal voting structures and virtual AGMs. ‘One vote, one share’ might long have been the mantra of most investors but with unicorns like Snap listing non-voting shares, unequal voting rights have come under increased scrutiny this proxy season. FTSE Russell and S&P Dow Jones Indices have each announced consultations regarding the inclusion in their indices of companies with non-voting share classes, and State Street has asked the SEC to change IPO rules to block non-voting shares.

And while only 5 percent of S&P 500 companies held a virtual-only shareholder meeting so far this year, EY says this is up from 3 percent in 2016 and the trend is causing alarm among some investors, which believe ‘[virtual-only AGMs] deny shareholders the opportunity to engage company leaders in person, and may shield companies from direct accountability and criticism.’

Finally, while EY says it is tracking more than 850 shareholder proposals to June 30 – around the same number as in 2016 – it also notes that Congress is considering changes ‘that would sharply curb the ability of investors to put forward such proposals.’