Tag Archive: institutional investors

Living in a Material World

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veenaramani

Veena Ramani

It is clearer than ever before that sustainability practices can affect corporate value. That was the main thread of a panel that I led at the National Association of Corporate Directors’ 2016 Global Board Leaders’ Summit in Washington, D.C. My co-panelists Christianna Wood, director at H&R Block, and Seth Goldman, founder of Honest Tea, and I discussed the potential risks and opportunities that environmental and social issues pose to companies.

Sustainability is a broad term, and not every environmental or social issue belongs on the board agenda. But when an environmental or social issue has the potential to affect corporate revenue and earnings in the short and long term, sustainability absolutely should be on the table.

At the end of the day, it all comes down to materiality, and this is where corporate directors have a critical role to play.

Materiality is about determining a company’s priorities. As fiduciaries responsible for overseeing a company so that it not only survives but also thrives in the long term, directors have a responsibility to assess whether a company is making the right choices.

But the much harder question is: When does an environmental or social issue rise to the level of being material?

Here are some steps directors can take to drive discussions about whether sustainability issues are material to the companies that they oversee.

1.) Understand how sustainability is being integrated into your company’s efforts as a way to identify material issues.

There are a few ways to do this. Directors could point management towards the Sustainability Accounting Standards Board’s Company Implementation Guide, which provides a great starting point for companies to assess whether certain sustainability factors could be considered material for the purposes of the company’s financial filings. Directors could also integrate themselves more meaningfully into corporate efforts aimed at identifying material sustainability issues. They could provide perspectives on the connections between sustainability factors, corporate strategy, risk, and revenue.

2.) Include key issues being raised by critical stakeholders in the materiality exercise. 

While a broader range of stakeholders is raising a variety of issues these days, the financial community is a particularly critical constituency to direct attention towards. As we discussed in our panel, the U.S. investor community is starting to make the connections between sustainability and the financial value of companies in their portfolios. During the 2016 proxy season, close to 400 shareholder resolutions on climate change and other sustainability issues were filed. Large investors including CalPERS, CalSTRS and State Street Global Advisors are asking their portfolio companies to put directors with climate expertise on their boards.

In addition to tracking broad sustainability trends that investors are paying attention to, prudent directors could consider opportunities to engage directly with key shareholders to get a sense of issues specific to the company and the industry. Directors could also track and engage with the broader activist and advocacy community as a risk management exercise.

3.) Weigh in on the time frame over which issues are considered to be material.

Since the board in particular is responsible for long-term corporate performance, directors play an important role in examining whether their company’s materiality process focuses on considering issues over the long or short term.

Overall, momentum is building to adopt a more long-term view to encourage companies and boards to think more broadly about sustainability and materiality. The recently released Commonsense Corporate Governance Principles, which are backed by major U.S. companies including JPMorgan Chase & Co., Berkshire Hathaway, and Blackrock, support the move to long-term thinking. And more companies including Unilever, Coca Cola, and National Grid are moving away from the practice of issuing quarterly guidance specifically to encourage investors and other stakeholders to adopt long-term thinking.

4.) Disclose details on what you consider to be your company’s material priorities.

Noting that determinations of materiality depend on whom the company considers to be its most significant stakeholders, governance experts are starting to call on corporate boards to release a statement noting critical audiences that the company is oriented towards and issues that the corporation is prioritizing. Companies like the Dutch insurance company Aegon have started to issue such statements.

The process of helping to identify the right issues is just a first step in a director’s responsibility on materiality. Directors have an important role to play in ensuring that material issues, when identified are integrated into board deliberations on strategy, risk, revenue and accountability systems. However, getting to the right issues lays an important foundation for the company and its key stakeholders to build on.


Veena Ramani is a senior director at the sustainability nonprofit Ceres. She runs the organization’s program on corporate governance. She recently authored the report View From the Top: How Corporate Boards Engage on Sustainability Performance.

Rethinking IR: Investor Insights

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Shareholder activism is on the rise. Between January 2010 and September 2013, shareholder actions carried out all over the world surged by 88 percent. Going back to the past 10 years, the number of shareholders with specific activist strategies has doubled. These statistics drive home the need for boards to have healthy investor dialogues year-round—not just when in the throes of proxy season. Looking ahead to 2015, a slate of top influencers in the investor community offered their insights on what the top priorities for boards are going to be. Panelists included: Donna F. Anderson, vice president and corporate governance specialist, T. Rowe Price; Glenn Booraem, principal fund controller, Vanguard; and Stu Dalheim, vice president, shareholder advocacy, Calvert. Peter Gleason, director, Nura Health and managing director and CFO, NACD, moderated the panel.

Using NACD’s Investor Perspectives: Critical Issues Board Focus in 2014 as a framework, Gleason noted that first and foremost: “It’s important for the board to know their investors. It’s too easy to lump them all together—but each investor has their own objectives. Engagement strategies are similarly different from one institution to the next. For example, Dalheim explained that at Calvert, their approach is always to engage with constructive outcomes in mind. Furthermore, there are three principles that guide their approach:

  1. Long-term value creation.
  2. Accountability, where management is accountable to the board and the board is accountable to shareholders.
  3. Sustainability, where companies that are sustainable from a financial, environmental, and societal perspectives will be more successful.

In addition, Dalheim explained that the approach to engagement strategy varies depending on the industry. Calvert has analysts that focus on specific sectors and know the governance practices in each sector. In that review process, they see which companies have room to improve. Furthermore, Calvert makes a point of fostering and developing relationships with portfolio companies over time, ensuring that there are open lines of communication. These open lines of communication are fortified by disclosures, which are critical to investor relations.

Anderson emphasized the responsibility of the shareholder on their side of the relationship. From her perspective, shareholders should respond to engagement requests in well-prepared ways, with the proper resources and with a team that is committed to creating a productive engagement experience. On the other side of the table, directors should engage if there has been a request to do so, or that there is a need for those exchanges to take place. With that in mind, she said that there are three key questions an institutional investor should ask before engaging with directors:

  1. Do we have standing to talk to these directors?
  2. Do we have something constructive to offer?
  3. Will this be constructive? And by extension, does the institutional investor think that the board will constructively work with them?

The panel closed by looking ahead at the pressing issues that will present themselves in the coming year. Anderson singled out the issue of bylaws: principles that institutional investors generally believe they can count on, but may not actually be in place for whatever reason. (For example, a company may have revoked its bylaws.) Boards may avoid putting certain bylaws into effect out of fear of activism; however, there needs to be a dialogue about what bylaws boards can change unilaterally.

Booream said that engagement is likely to be triggered by observable components that cause a board to be an outlier—for example, boards whose directors have above-average tenure or boards that lack minority directors. On this score he advised directors to observe the ways in which their boards are outliers, and either own it and explain why their governance practices are in shareholders’ best interests or fix the problems. Shifts in boardroom mindsets will not happen overnight, so it’s important to initiate those conversations as soon as possible.

Dalheim pointed to the issue of director qualifications. He said that boards should have a list of areas of expertise that are needed to effectively oversee the company and then explain how the current board slate illustrates those attributes. In his opinion, this list helps boards identify what’s needed to create growth. Nevertheless, there is currently little disclosure with regard to board evaluations, in terms of either the process or the outcomes. Some companies have an annual statement about board performance–and resulting action steps–which may be a pay that draws increased scrutiny in the coming year.

NACD Directorship 2020™

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According to Confucius, one should “study the past if you want to define the future.”  With that in mind, President and CEO Ken Daly led the session to officially kick off NACD’s future-defining initiative with panelists that have a storied history in the world of governance. The panel comprised Raymond Gilmartin, former president and CEO of Merck & Co., lead director at General Mills, and the newest member of NACD’s board of directors, and Myron Steele, Chief Justice, Delaware Supreme Court.

Based on the observation that capitalism is undergoing a profound shift as a result of shareholder activism, technology, and regulatory activity, work to define and shape NACD Directorship 2020 has been underway for several months. Starting this spring, NACD held three events to discuss and hone the direction of research topics in New York City, Chicago, and Los Angeles. Three areas came to the forefront: information flow, performance metrics, and disruptive technologies. For recaps of these sessions, visit nacdonline.org/directorship2020.

Changes in the Boardroom 

According to Steele, the most significant changes in the boardroom have been the shift in dynamic of ownership from retail to institutional investors, and the dominance of independence in the boardroom. In the past, the majority of investors were retail, now 60 to 70 percent of stock ownership is in the hands of institutional investors.

As a result of Enron and WorldCom, Sarbanes-Oxley required the board to become more independent than ever before. And yet, as Chief Justice Steele observed, without an empirical study to support this requirement, the legislation missed the mark. Of the 17 directors on Enron’s board, 15 were independent and it “still resulted in a massive failure of corporate governance.”

In his remarks, Chief Justice Steele stressed his belief that regardless of who comprises the shareholders, authority, balanced with accountability, rests with directors. “It is still fundamentally the responsibility of directors to manage the corporation with oversight, loyalty, and care. Also the underlying dynamic has changed, the authority and accountability of directors has not.”

TSR and Short-Termism

Continuing off a theme that began last night with keynote speaker Raj Sisodia, Gilmartin addressed the increasing focus placed on generating short-term quarterly results. Maximizing shareholder value above all else has reinforced practices that can be detrimental to society. Although some practices, such as laying employees off, are sometimes required, they are currently being used with a frequency that destroys long-term value and the future survival of an institution.

But directors have an opportunity to change this. NACD Directorship 2020, according to Gilmartin, “allows an opportunity to challenge the conventional wisdom that has developed over the last few years.”

Innovation and Risk Taking

Both Chief Justice Steele and Gilmartin emphasized the need for innovation and risk-taking in boardroom culture. In addition to using incentive systems that focus on the creation of long-term value, Gilmartin suggested using the company’s ability to innovate as a performance metric.

Chief Justice Steele addressed the increasingly litigious nature of directorship, which as Ken Daly noted has become, “not if you’ll be sued, but when you’ll be sued.” According to Chief Justice Steele, the business judgment rule is alive and thriving. Directors should feel free to take the necessary bold steps to create economic value. “Society is dependent upon a board being empowered to take risks on behalf of shareholders—that is what builds the economy.”