IN-DEPTH: Voting policy updates focus on director accountability
Recent months have seen both institutional investors and proxy advisors update their voting policies to reflect their engagement priorities and how they intend to hold companies to account on a variety of corporate governance topics in 2024.
As of May 31, 2024, Diligent Market Intelligence (DMI) added 280 new investor policy documents to the platform, many of which indicated a move to enhance director accountability for ESG concerns, as well as push for greater climate-related disclosure and pay for performance alignment.
Holding directors to account
Director accountability has been a recurring theme among investors as they tweak their policies ahead of the 2024 season, particularly in regard to climate-related risk oversight.
Vanguard Group updated its U.S. and U.K. policies, stipulating that the $7.2-trillion asset manager may withhold support from directors “deemed responsible” where the board has “failed in its oversight role” or failed to respond to actions approved by a majority of shareholders.
Globally, Amundi Asset Management now expects boards to “disclose an explanation” where proposals have been subject to a significant level of dissenting votes and demonstrate a reasonable level of responsiveness in addressing these concerns. Where a company has not responded adequately on climate strategy or human capital management concerns, the $2.3-trillion institutional investor said it may vote against the company’s chair and/or its sustainability report, where relevant.
The New York State Comptroller similarly revealed it will now withhold support from audit committee members or directors responsible for climate risk oversight when the company fails to “disclose and appropriately manage” climate risks.
Proxy advisors also reinforced the need for director accountability, with Glass Lewis updating its U.S. policy to state that environmental and social oversight at the board level should be “formally designated and codified” in governing documents.
Governance concerns can also foster dissent toward directors, with As You Sow revealing it will vote against the entire board where companies look to “bypass” the Securities and Exchange Commission’s (SEC) no-action process and instead first challenge a resolution through litigation.
All eyes on nominating committees
Nominating committees will also be subject to enhanced scrutiny, with several asset managers noting that they will look to committee members to enhance disclosures concerning board composition processes and policies.
In BlackRock’s updated U.S. policy, the world’s largest fund manager representing $9.1 trillion in assets revealed it may vote against responsible committee members where there is “significant concern regarding the board’s succession planning efforts.”
Starting in 2024, $4.1-trillion asset manager State Street Global Advisors (SSGA) will oppose nominating committee chairs at S&P 500 companies that do not publicly disclose their director time commitment policies and descriptions of annual review processes to evaluate director time commitments. Similarly, $2.2-trillion asset manager Capital Group may oppose directors at Europe-based companies which do not provide clarification as to why directors have taken on an excessive number of mandates.
Nominating committee members may also face withhold votes from the New York State Comptroller where the board is not sufficiently diverse or insufficient efforts have been taken to address board racial and gender diversity, it said.
Investors are also seeking enhanced disclosure of director skillsets. Going forward, Vanguard expects U.S.- and U.K.-based companies to disclose skills matrices, outlining director tenure, skills and relevant experience. To this end, it may support shareholder proposals seeking disclosure of the board’s approach toward board composition.
Strengthening sustainability disclosures
For the first time this year, Glass Lewis will look for robust sustainability disclosure at S&P 500 and FTSE 100 companies operating in industries where the Sustainability Accounting Standards Board (SASB) has determined that emissions represent a financially material risk. Such disclosures should align with Task Force for Climate-related Financial Disclosure (TCFD) recommendations and outline board-level oversight responsibilities, it said.
Where an annual advisory vote on a company’s climate transition plan is provided, Amundi now expects companies to disclose “comprehensive” targets, baseline figures and scenarios across Scope 1, 2 and 3 emissions, a “precise” agenda covering short-, medium- and long-term objectives and a three-to-five-year investment plan, it said.
Climate-related lobbying is also a priority, with $844-billion fund manager Axa Investment Management revealing it may vote against relevant ballot items at high-emitting companies that “fail to adequately report on their climate lobbying activities.”
In regard to biodiversity, BlackRock now looks for companies globally to disclose how they manage any reliance on and impact on natural capital, including how these factors are integrated into business strategy.
Going forward, $663-billion asset manager Fidelity International will vote against European companies that fail to meet minimum expectations on deforestation, while $460-billion fund manager Neuberger Berman expects companies to “proactively identify, evaluate and mitigate financially material biodiversity and provide transparency to shareholders regarding these efforts.”
Compensation
In the U.S. and the U.K., Vanguard clarified its process for evaluating pay for performance alignment, revealing it will look for director incentive targets aligned with corporate strategy. The fund manager will also analyze three-year total shareholder returns (TSR) and realized pay compared to relevant peer groups over three years.
Amundi revealed it prefers variable compensation to make up less than 30% of director remuneration and to be linked to quantitative key performance indicators (KPIs), while As You Sow will now recommend voting against CEO pay that is greater than the 75th percentile of company peers.
At U.S.-headquartered companies where performance share units (PSUs) are in use, JP Morgan expects companies to disclose relevant metrics. The asset manager will vote against compensation plans where PSU metrics and/or targets are changed mid-cycle without adequate disclosure and rationale supporting such change.
Axa will take cost-of-living concerns into account when evaluating executive pay, stating that wider workforce pay will be considered when evaluating director compensation, particularly when the board is proposing a pay increase for lead executives.
