2018 Investor Corporate Governance Report

Viraj Patel is Head of Proxy Operations at CMi2i Proxy. This post is based on a CMi2i publication by Mr. Patel, Tony Quinn, and Mark Simms. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The CMi2i 2018 Annual Investor Corporate Governance Report surveyed institutional shareholders representing $8 trillion of Assets under Management (“AUM”). The objective of the report is to find out which Environmental, Social and Governance (“ESG”) areas they believe will be key issues of focus in 2018 and beyond, and the impact of this on shareholder behaviour. Respondents comprised of individuals responsible for corporate governance, responsible investment and proxy voting from US and European institutions.

1. Increasing Shareholder Accountability Precipitates Increasing Board Accountability

Increasing engagement with non-executive board members, increasing “active” style voting, increasing integration of ESG factors into the investment process, wider issues on the ESG Agenda including Human Capital and Corporate Culture are key themes in the CMi2i 2018 Annual Investor Corporate Governance Report.

Covering over 1,200 funds in Europe and the US, accounting for over $8 trillion of funds under management, the Report tracks the ongoing evolution of shareholder corporate governance issues and activity in light of changing regulatory, accountability and broader societal trends such as inequality, diversity and the breakdown in trust of traditional institutions following the financial crisis.

2. ESG Is an Integral Part of the Investment Process

The impact of ESG as an integral part of the investment decision making process continues to rise. With 71% of respondents increasing their stewardship teams over the last five years, ESG is increasingly considered to be a fiduciary duty of investors (further reflected in the increased number of signatories to the Principles of Responsible Investment, where in 2017, those signatories represented $68 trillion in AUM).

The research shows that asset managers are facing increasing pressure from their clients to demonstrate that they have assessed fundamental ESG risk and opportunity within their investment strategies, as well as how their portfolio companies make positive contributions to sustainable development. 88% of investors systematically integrate ESG factors into the investment decision-making process. This integration strategy is followed by negative/exclusionary screening (76%). Maximising Risk Adjusted Returns is cited as the primary reason behind this development (88%) closely followed by Client Demand (65%) and Contributing to Sustainable Development (65%).

3. Greater Non-Executive Board

With the growth of shareholder accountability and the role of ESG in investment decisions, the research shows that there is strong interest from respondents to hold dialogue with their portfolio companies on a range of ESG areas, but that issuers are not fielding the relevant representatives during these meetings. Respondents want Boards to hear unfiltered and unvarnished views from their shareholders. Consequently, there is strong shareholder demand to meet with the non-executive Board members including the Chairperson (94%), Senior Independent Director (76%) and Committee Chairs (71%).

In addition, a common theme throughout the Report is that institutions will look to hold Board directors accountable through expressing their concerns by voting against their re-election at AGMs if they do not feel issuers are responding adequately to dialogue. 59% of respondents claim that ESG issues would impact how they vote around director re-elections.

4. Increasing Investor Collaboration and Escalation in Forcing Change

Shareholder engagement is not limited to direct individual interaction with issuers. It is also taking place increasingly in the form of collaborative engagement with other shareholders. To form a consensus of opinion as to what constitutes best practice, investors will pool their resources and share ideas. All our respondents have led or supported collaborative engagement in the past, with 50% of them expecting this to increase in the future. Their collective objective is to explore how they can positively influence company corporate governance standards.

At the same time, escalation is rising. Last year only 13% of our respondents would have considered escalating their engagement by requisitioning a shareholder meeting or by supporting others that did. However, this year, the number has jumped to 59%. This would suggest that strategies previously perceived as “shareholder activism” could now just be considered “constructive investing.”

It is also worth noting that in the case of passive investors, for example those managing Index Funds, the only way to minimise investment risk or unlock value is by using their voice and their vote. Escalation policies are therefore of paramount importance to them, and with the substantive presence of such passive investors on share registers, issuers should expect escalation to be a growing risk if investor transparency and/or ESG policy expectations are not met.

5. Human Capital and Corporate Culture Join the Dynamic ESG Agenda

With ESG investing progressing into the mainstream, so has the range of subjects that are coming within its scrutiny. This year, for example, saw Gender Diversity increasing from ninth position in 2017 to second in 2018, with Human Capital and Corporate Culture coming on to the agenda for the first time. The Survey also highlights that companies are still not providing adequate disclosure on environmental and social impact. For example, 94% of respondents “Very Often” or “Often” request further disclosure on climate change policies. The same number of respondents would prefer to see the responsibility of sustainability oversight shared across the entire Board rather than just by a standalone committee. With the ESG agenda in such a dynamic state, the need and desire for investor engagement with the Board is only likely to become stronger.


The evolution of ESG issues in the investment process is proving to be both fast and dynamic. In the first instance it is manifesting itself in a desire for increased transparency and engagement across a dynamic range of subjects. If these demands are not met, then direct, potentially collaborative, action through divestment and/or escalation is highly likely. Already in 2018, two of the world’s largest passive investors, Blackrock and Vanguard, publicly stated their commitment to increasing their ESG teams, and committing to hold companies to account on ESG issues. Similarly, the recent events surrounding Carillion in the UK have seen both shareholders and Board members brought before a Parliamentary Select committee and accused of being “asleep on the job.”

Non-executive Board members therefore need to keep themselves more informed than ever and be prepared to ensure that they inform their shareholders and other stakeholders on how they are approaching, assessing and managing their ESG risk and opportunities.

The complete publication is available here.

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