In a corporate directors survey (the Survey) entitled “The swinging pendulum: Board governance in the age of shareholder empowerment”, PricewaterhouseCoopers LLP (PwC) presents current trends in investor influence and their impact on governance practices of boards and management teams.
Conducted amongst 884 company directors in the summer of 2016 with respondents representing over 24 industries, the Survey highlights the increasing influence of investors and board sentiment in this “new age of shareholder empowerment”.
When recruiting new board members, investor recommendations appear to carry increasing weight. The Survey notes that there has been an increase from 11% in 2012 to 18% in 2016 in the use of investor recommendations as a consideration in the recruitment of new members. The Survey shows, however, that existing board members’ recommendations, search firms and management recommendations remain the predominant sources of information for identifying new directors.
While 96% of respondents recognize board diversity as “at least somewhat important”, 83% indicate that there are impediments to increasing board diversity. Of the impediments, respondents note that a limited pool of diverse director candidates is a significant factor. Regardless of the perceived obstacles, a majority of directors believe that diversity positively impacts board effectiveness and company performance.
PwC states that a major obstacle to establishing more diverse boards is that boards are looking for current or former chief executive officers as potential new directors and, as an example, only 4% of S&P 500 CEOs are female and only 1% of Fortune 500 CEOs are African-American.
With respect to gender balance, 20% of S&P 500 board members are female and 31% of new board members in 2015 were women. The Survey cites research that shows that Fortune 500 companies with higher representations of female board members “attained significantly higher financial performance, on average, than those with the lowest representation of female directors”.
Director communications and shareholder activism
According to the Survey, direct communications between board members and investors has grown in prevalence in the past several years. While more than 50% of respondents note that they have engaged in direct communications, the Survey reports that directors are still unsure as to whether these lines of communication significantly impact shareholder behaviour. Only a small number of respondents supported the notion that direct engagement impacts investing decisions and proxy voting.
Regardless of the scale of impact, PwC recommends ongoing engagement with shareholders as a best practice. Large shareholders should be the focus of communications and topics such as capital allocation, executive compensation and strategy are important areas to broach. One of the reasons for proactively engaging with shareholders is to “[get] ahead of activism”. 79% of directors state that their board took some action related to shareholder activism in the previous 12 months.
Responses to Survey questions related to strategic time horizons suggest that boards are responding to investor pressures to reduce emphasis on short-termism and instead focus on building a framework for long-term shareholder value creation. The Survey also notes that investors have increasing influence over how a company uses its resources. For example, nearly half of the director respondents state that their company increased share buybacks as a result of investor demands.
In an age of broadening shareholder empowerment, boards and management teams would be prudent to proactively engage with shareholders and develop lines of communication with respect to hot topics such as long-term strategy, use of resources and board composition.
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The author would like to thank Vincent Belley, articling student, for his assistance in preparing this legal update.