According to Morrow Sodali's 2018 Institutional Investor Survey, institutional investors are seeking from their portfolio companies: (i) a clear articulation of - and enhanced disclosures on - business strategy and goals; (ii) board composition information that will (among other things) enable them to form judgments about the suitability of individual directors; and (iii) an explanation of the business rationale for board decisions and how they align with strategy and performance.
Based on the findings, Morrow Sodali identified these top priorities and developments for 2018:
- Investors will prioritize directors’ skills ahead of their gender or ethnic diversity.
- Unjustified pay will come under intense scrutiny. Investors want to see better P4P alignment.
- Investor collective engagement & collaboration around broader annual shareholder meeting topics will increase exponentially.
- Institutional Investors will be increasingly likely to support a credible activist story. Poor capital allocation is a key concern.
- ESG issues are either fully integrated (49%) or progressing towards full integration (44%) with investment decision-making.
- Investors will seek enhanced disclosure around materiality and sustainable metrics linked to long-term business strategy.
Additional noteworthy takeaways include:
- When asked which of these attributes is more important when evaluating directors, Skills ranked #1, followed by Qualifications + Experience, with Independence ranking last. Asked differently in terms of the most important director diversity criteria, Skills was also ranked #1, followed by Experience, and then Gender.
- When asked what action they would take if a company won't allow direct communication between directors and shareholders, 60% of respondents said they would engage with the company; 19% said they would withhold votes from the Nom/Gov Committee Chair or other board members; and 12% said they would collaborate with other shareholders' initiatives. Just 9% said they would take no action.
- 61% of respondents said that the CEO pay ratio is useful, compared to 39% who said it is not.
The report elaborates on investors' input on the CEO pay ratio:
61% of respondents suggest the pay ratio will be a useful statistic. Many respondents stated that this is a good starting point but “it may not have immediate value however the statistic would be useful to track over time and compare with peers.” While many US respondents suggested “the ratio between the CEO vs NEO is more important and valuable.” Some of the respondents also indicated “a better tool would be CEO pay vs the average in the executive committee.” Finally, many respondents suggest companies should continue to increase engagement with key stakeholders to discuss the logic behind the rationale and its appropriateness.The annual online survey - capturing responses from a diverse mix of 49 global institutional investors representing $31 trillion in AUM (58% active/42% passive) - was conducted November/December 2017.