Support for directors at U.S. corporations has declined over the past five years, as companies have failed to adapt to the gradual shift in policies from institutional investors.
What is the trend?
The number of companies with at least one director receiving below 95% support has grown from 2,032 in 2016 to 2,498 in 2020 and 2,683 so far this year. Furthermore, in 2016 there were 489 companies with at least one director with support between 55% and 80%, compared with 716 companies in 2020 and 757 in 2021.
The mean minimum vote for director elections was 90.2% in 2016. This has steadily declined to 87.7% in 2020 and 88.8% year-to-date.
Who is making it happen?
While the broader shareholder base might have become more likely to voice their opposition via votes, the three largest passive index funds – BlackRock, State Street Global Advisors (SSGA), and Vanguard, which between them typically own at least 20% of any public company – have led the pack.
On average, BlackRock backed management-elected directors 95.1% of the time in the 2015, Proxy Insight Online data show. This number abruptly declined in 2019 to 91.1% and has stayed low in the following two years. Vanguard’s support also fell in 2019 but recovered somewhat in the following years, although still below the four-year period through 2018.
Meanwhile, SSGA, which has historically been the least indulgent with directors from the trio of the largest passive index funds, voted for against directors 87.8% of the time in 2021, down from 90.8% in 2016.
Advisers also say that retail investors are becoming increasingly active with their voting rights.
Why is it happening?
“Institutional investors vote against directors more frequently and for more reasons than they would have in the past,” Brian Valerio, senior vice president at Alliance Advisors, said in an interview with Activist Insight Online. Overboarding and diversity are two key reasons for votes against directors, but not the only ones. Climate change, executive compensation, and human capital management are just three issues that have been driving ‘against’ votes more recently, according to Valerio.
James Hamilton, a director at PJT Camberview, agrees. “Whereas directors used to receive against or withhold votes primarily for traditional governance deficiencies such as independence and attendance, today, many investors are putting in place policies that hold directors accountable for outside board commitments, board and workforce-related disclosures and oversight of ESG,” Hamilton has told Activist Insight Online.
Indeed, the key reason BlackRock has stepped up its opposition to directors in the Americas since at least 2019 is lack of diversity on boards. In 2020, when BlackRock’s number of “withhold” or “against” votes for directors reached a record, diversity was cited in 1,367 cases in the Americas region. The runner-up reason was lack of independence with 246 companies.
SSGA, while not disclosing a breakdown of reasons it voted against directors, dedicates a good part of its engagement to diversity. Its Fearless Girl campaign is focused on engagement with companies around diversity and those companies that fail to improve are typically penalized.
“We believe that the director vote is the most effective tool in holding directors accountable for the oversight of ESG risks and opportunities. As the financial materiality of ESG-related issues increases, so does the responsibility for effective oversight,” Ben Colton, global co-head of asset stewardship, at State Street has told Activist Insight Online.
And SSGA’s policies are only getting stricter. For the first time this year, SSGA expects S&P 500 companies to disclose the racial diversity of their board. Starting in 2022, SSGA will vote against directors at S&P 500 companies that don’t feature at least one director from an underrepresented community.
How sustainable is the trend?
Institutional investors are expected to continue to change their policies and hold directors accountable for implementation. Those companies that fail to comply with this moving target face the risk of seeing high dissent against their directors.
However, advisers say issuers need not fall behind. “Companies can stay at the forefront of these evolving trends through an active, year-round investor engagement program aimed at understanding investors’ evolving expectations,” Hamilton said.
Valerio said that, in general, “institutional investors are in broad agreement on what are the most important ESG issues – diversity and climate change.”
“However, on many other important subjects like overboarding (two director seats for CEOs and four for regular directors is the emerging trend, etc.) and disclosure, there are varying standards and definitions, so companies need to look into their shareholders’ specific expectations,” Valerio adds.