Over the past few months several leading investors have released stewardship reports detailing their engagement efforts with portfolio companies.

The reports published by BlackRock, Vanguard, State Street Global Advisors (SSGA) and the California Public Employees’ Retirement System (CalPERS) are a must read for insights into how the largest investors interact with portfolio companies and their views on a variety of governance issues, including executive pay. The detail of these reports and underlying activities by these investors is a testimony to the teams and resources they have assembled in recent years to responsibly engage with portfolio companies and vote their shares.

The wide use of the environmental, social and governance (ESG) label is also notable. This broader term includes traditional topics associated with “governance” or “corporate governance,” engagement activities and other topics such as diversity.

A review of these stewardship reports validates the commitment to broader issues by these, and likely other, investors. We summarize highlights from the reports (with links) to augment the discussion of human capital topics, particularly diversity and gender pay, and traditional executive compensation issues:

Investor Report Highlights
BlackRock
Investment Stewardship Report: Americas, Q2 2018
  • Engagements—352 engagements, mostly characterized as “basic,” which BlackRock defines as a single conversation on a routine matter, were conducted. The majority of topics discussed were identified as governance-related as opposed to environmental or social.
  • Votes on executive pay—During the period BlackRock voted against 4% of all management recommendations, and executive compensation proposals were not separately broken out.
  • Diversity—Engagements related to board diversity were initiated at companies in the Russell 1000 index with fewer than two women on their board.
CalPERS
Global Equity Corporate Governance Program Update, September, 2018
  • Votes on executive pay —CalPERS voted against 43% of executive compensation proposals, up from 18% in 2017. Negative votes were driven by pay-for-performance disconnects with such features as short performance periods, poor disclosure and discretionary awards, among other items. The increase in negative votes is also attributed to updates to CalPERS voting policies that came into effect in January 2018.
  • Diversity—During the 2018 proxy season, 30% of the companies CalPERS engaged with added a diversity director. It voted against over 400 directors at 141 companies where diversity discussions were not satisfactory.
SSGA
Stewardship 2017, July 2018 
  • Engagement —In 2017, SSGA engaged with 610 companies, 67% of which were in the U.S. Globally, SSGA initiated 85% of its engagements, with the remaining 15% taking place at the company’s request. And globally, 31% of engagements discussed compensation.
  • Votes on executive pay —SSGA voted against 34% of the say-on-pay proposals in the U.S. Interestingly, it supported 39% of the total say-on-pay proposals in its portfolio “with reservation.” SSGA vote decisions on pay were largely driven by identified concerns with pay policies, structure or disclosure.
  • Diversity—SSGA sent 600 letters on the issue of board gender diversity (and voted against over 500 companies in the U.S., U.K. and Australia that had no women on their boards). Partly in response to these letters, 129 U.S. companies added a female director.
  • Other—In 2018, it is evaluating the compliance of S&P 500 companies with the Investor Stewardship Group’s Corporate Governance Principles. Separately, SSGA’s report provides insights into topics that interest it for the real estate, insurance and media sectors.
Vanguard
2018 Investment Stewardship Annual Report
  • Engagement—721 engagements were conducted with portfolio companies, of which 40% included independent directors. Executive compensation was discussed in about half of their engagements. A London team was established.
  • Votes on executive pay—Vanguard voted in favor of 95% of EC-related management proposals in the U.S. It voted against 318 compensation committee members for failing to act on compensation matters in response to shareholder feedback.
  • Diversity—Fewer board-related gender diversity shareholder proposals were observed in light of progress made on this issue. Vanguard voted in favor of four of nine shareholder proposals on this topic.

A look ahead at what’s to come

These reports directly or indirectly discuss a variety of topics that will be of future importance. For instance, with respect to diversity, more than one reference was made to the idea that diversity extends well beyond gender, while also recognizing the recent focus on board diversity, and specifically, the number of female directors on boards at portfolio companies. Going forward SSGA expects to seek more disclosure of gender diversity at all levels of management and will seek to understand broader company activities during the engagement process. CalPERS intends to seek employment data for the broader workforce to assess the diversity of the company’s employees and possibly the leadership pipeline.

The topic of risk was also prevalent and from a variety of perspectives including how these investors engaged with portfolio companies on issues such as cybersecurity, firearms, activism, company strategy, the opioid crisis, climate and sexual harassment. In these cases investors generally note they seek to understand how portfolio companies promote a culture of risk oversight, including what reporting the board receives and how the board oversees risk. This understanding of a portfolio company’s risk appetite and culture is important given investors’ long-term approach to investment and the costs borne by shareholders—reputational, monetary if fines are imposed, lower market value or other penalties—when risk is not carefully evaluated.

Overall the reports offer a transparent look at what interests these large investors, which bears watching because, by virtue of their size, they are likely to own shares in almost every U.S. public company. The content of these reports is an important companion to the published voting policies and vote records of these investors. They are also a timely resource to inform companies as they prepare to engage more broadly ahead of the 2019 proxy season.


ABOUT THE AUTHOR

Jim Kroll 

Jim Kroll

Willis Towers Watson
Los Angeles


Jim Kroll is a director in Los Angeles who leads Willis Towers Watson’s governance advisory practice for executive compensation. Email james.kroll@willistowerswatson.com or executive.pay.matters@willistowerswatson.com.