A time to consider the results…

Paloma del Val Tolosana, General Secretary of FMBBVA

Paloma del Val Tolosana, General Secretary FMBBVA 

Clearly, the market needs abundant clear, to-the-point information to understand the coordination between the business fundamentals, the strategic goals and the associated risks

This time of the year is when companies present their annual results and come up with plausible explanations for their good, bad or middling performance… Aggregated numbers can invite creative interpretations.

Recently, Morrow Sodali, a London-based consultants firm, published the results of its third annual bellwether survey, in which this year 49 institutional investors world-wide with assets under management of USD 31 trillion expressed their opinions and expectations.

One key question focussed on the most relevant factors when making decisions about proxy-voting on the items in the AGM agendas for their portfolio companies.

The 2018 answers to this show that institutional investors score good corporate governance higher than good financial earnings. In their view, long-term sustainability trumps short-term wins. They watch the whole movie, not just the trailer. And they care about the companies’ contribution to society as much as the returns they offer shareholders.

There are three points that most worry investors, over and above the economic performance –which ranks fourth in intensity of concern. These relate to business strategy and reporting, the work they expect the board of directors to do, and stakeholder relations.  These issues hold increasing sway over decision making.

First and foremost in the survey answers, investors express the need for quality and coherence in their portfolio companies’ business-strategy reporting. They want to see the board play a very active role in assessing and monitoring the corporate strategy.

Without a doubt, the market needs abundant clear, to-the-point information to understand the coordination between the business fundamentals, the strategic goals and the associated risks. Investors want to be able to measure the value contributed by the directors and the links between the policies and how their decisions feed into effective administration that achieves long-term financial returns for the company.

When analysing the dynamics of the board for the 2018 Annual General Meetings, the investors hone in on: the directors’ ability to position their companies within an evolving society and enhance their capacities to create sustainable value; the connection between corporate strategy and the management of associated risks; ongoing digital transformation and innovation; cybersecurity; internal talent management and an ever-closer relationship with shareholders over the long term.

Another of the concerns flagged in the report refers to the composition of the board of directors. Transparency regarding this issue has improved substantially over recent years, thanks to a combination of new regulations and corporate governance codes that have focussed on the procedures for appointing independent directors and ensuring they are recruited on the basis of objective merit, such that their profiles match the requirements of the enterprise.

The survey shows that investors expect the boards of their investee companies to play a vital role in developing communities where they operate, and consider they should represent a similar degree of diversity as they find in those communities.

This is such an important matter, that the October 2017 issue of The Parker Review published an article on board representativeness, arguing that it should not only consider gender but also ethnic and geographical diversity. It proposed that every FTSE 100 board should have at least one director with an ethnic-minority background for 2021, and that this requirement should be extended to every FTSE 250 board by 2024.

The debate about the diversity of board members will unfold further in the next few years, and will doubtlessly remain an important benchmark for investors, regulators and governments, as different stakeholders become increasingly powerful and increasingly diverse.

However important the tendency towards greater diversity in director’s backgrounds, it must always be accompanied by the right match with the skill sets and experience that boards require each of their members to display in order to effectively perform their duties.

The third concern among institutional investors was the quality of stakeholder relations. Investors increasingly analyze companies to see how much they integrate ESG (Environment, Social & Governance) principles and policies into their management processes. They want the materiality of the companies’ commitments to be properly disclosed, so they can track key performance indicators in the annual reports and, in particular, in the corporate governance reporting.

The Morrow Sodali document shows that investors are become more and more insistent that ESG principles underpin long-term corporate sustainability. Specifically, the survey reflects the investors’ opinion on the degree to which their portfolio companies mainstream these principles into the way they manage their business. The result is encouraging: 93% of those surveyed state that ESG principles are either “fully integrated” or “progressing towards full integration”.

Just behind financial and business performance in the survey, at some distance, institutional investors express concern over their companies’ relationship with shareholders. Further behind still ranks the availability of board members to communicate directly with shareholders.

The 49 international investors, with over USD 31 billion of assets under management, show that they are putting their money behind good governance, transparency and commitment to society and stakeholders. These are as the key “business attitudes” they consider to best reflect their portfolio companies’ underlying performance over time.