Sticking to our end-of-the-year tradition, we invited back Paula Loop, Leader of PwC’s Governance Insights Center, to once again reflect on “What Boards Should Have Learned in 2016.” In this special holiday episode, Loop and host TK Kerstetter spend significant time on shareholder engagement and its evolution throughout 2016. There’s no doubt that shareholders played a significant role in shaping this year’s board governance landscape. Specifically, we take a look at three trends, which allow us to visualize how shareholder engagement may continue to evolve in 2017:
1. Investors have come to expect direct engagement with board members.
What was once ‘taboo’ has become quite ‘mainstream’ in 2016. Major investors have come to expect direct engagement from the board of directors, particularly on issues like compensation, CEO succession, and corporate strategy. In our discussions with BlackRock, Vanguard, CalSTRS and more, we’ve come to find that these investors are most concerned about whether the board “gets it.” They simply want to know that board members understand company operations, that they have a strategic eye to the future, and that the collective board has the necessary skills for the road ahead. While investors’ expectation for engagement has been concentrated on large-cap companies, mid- and small-cap boards can expect similar pressures in the years ahead.
Our Follow-Up Question: Many boards have been quick to respond to investors’ call for engagement—but, how do board members feel that shareholder engagement is going? In this episode, Paula Loop discusses the feedback from PwC’s Annual Corporate Directors Survey; in response to investor pressures, 48% of board members changed up their capital allocation strategy, while an even larger percentage made changes to the composition of their board. What kinds of pressure are boards feeling from these engagements? Are these pressures always in the company’s best interest? Loop and Kerstetter discuss.
2. Long-termism has become the golden standard.
On the whole, increased pressure from investors (and the resulting dialogue) has been a very positive trend in board governance. However, not all pressure is good pressure—particularly when activist agendas are focused on short-term gains. Luckily, major institutional investors are in agreement when it comes to the board’s priorities, and long-term value creation is at the very top of their list. In 2016 annual letters, BlackRock’s CEO Larry Fink and Vanguard’s CEO Bill McNabb both reiterated the importance of long-term thinking as boards and management outline their corporate strategy for the years ahead. The long-term orientation of the major institutional investors should be comforting to corporate directors, as they attempt to balance conflicting shareholder feedback in the months and years ahead.
3. Investors and boards are quickly establishing best practices for engagement.
Like a middle school dance, early engagement between shareholders and directors was sometimes an awkward exchange. Neither party was quite sure how to speak to the other, and it took both sides a little time and practice to reach a level of productive interaction.
In 2016, pioneering investors and governance leaders began to establish best practices for shareholder engagement; investors began to clearly articulate what they hope to gain from these interactions, whether it’s measurable objectives or a plan for board diversity. In 2016, the Commonsense Principles of Corporate Governance also established a baseline for boards with respect to responsible governance and shareholder engagement. While many boards are still largely trying to discern what their engagement efforts should look like, 2016 saw great strides as investors communicated their expectations for board/shareholder engagement. Indeed, it will be interesting to see how shareholder engagement continues to evolve in 2017.