ON THE LEFT: Global trend works out in investors’ favour
Should more attention be paid to corporate governance issues?
Over the past few years, institutional investors have held boards increasingly accountable for company performance and have demanded greater transparency and engagement with directors. Investors’ interest in more disclosure and interaction arises from their desire for improved performance, both on the part of boards and in terms of overall corporate governance.
The real question investors are asking is: How can we be sure we have a high-performing board in place? Most of the governance reforms currently under discussion globally attempt to address that question.
As investors drive change in governance and raise the bar for board quality, the role and job description of public company board directors is evolving – in many cases, rapidly.
Successive waves of corporate scandal have reshaped the landscape of corporate governance around the world and continued to do so in 2015. Most observers believe that the Petrobras scandal in Brazil, Satyam and more recent incidents in India, Toshiba in Japan, and perhaps Volkswagen in Germany will have a substantial impact on corporate governance in those countries as legislators, regulators, and institutional shareholders demand more tools to promote accountability and transparency from companies and their boards of directors.
Around the world, large institutional investors continue to push hard for reforms that will enable them to elect independent non-executive directors who will constructively challenge management on strategy and hold executives accountable for performance (and pay them accordingly). When trust breaks down, activist investors (often hedge funds) move in to drive for change, often with institutional support.
Institutional investors are becoming more global in their operations and outlook as their international investment holdings and commensurate governance staffs have expanded.
They want to see a core set of shareholder rights and responsibilities applied across all the markets in which they invest. Why, they ask, do they have proxy access, say on pay, and majority voting in some countries and not others?
The 2015 corporate governance reforms in Japan were in part driven by United States and other international asset managers who demanded higher levels of transparency and director independence.
Investors may be increasing their scrutiny of boards, but they are also under pressure themselves. In the United Kingdom, the financial crisis gave rise to a new investor stewardship code, and similar codes are being implemented in many other countries, including Japan and Malaysia. These codes attempt to ensure that investors fulfill their responsibilities to manage their investments and vote their shares transparently. Additionally, over 1,300 institutional investors globally, representing US$59 trillion assets under management, have chosen to sign on to the UN Principles of Responsible Investing, which seek to integrate environment, social, and governance concerns into investing objectives. Therefore, we expect to see greater shareholder focus on environmental and social factors in 2016.
The wisdom conveyed by the old Russian proverb “trust, but verify” underlies the actions of institutional investors as they seek to monitor their investments in many thousands of public companies globally.
Not even the largest investor has the resources to get to know the directors they are electing to oversee management on the investors’ (or other stakeholders’) behalf. Given the scale of their holdings, many investors will continue to rely on proxy advisory and research firms to identify companies with poor performance and governance red flags.
Russell Reynolds is a global assessment, recruitment and succession planning firm.