ESG and pay are top concerns among engaged investors

Nov 19, 2019
Investors have mixed feelings about pay-for-performance metrics, according to new report

Engaged investors’ top concerns revolve around ESG issues and executive compensation. Seven Lessons from Engaged Investors, published recently by Farient Advisors and the Global Governance and Executive Compensation Group, finds deep investor concerns on topics such as how their companies’ activities are affecting the world around them, gender diversity and pay equality.

‘In general, investors are very concerned about climate change and human capital management,’ says Marc Hodak, partner at Farient, an independent corporate governance and executive compensation consultancy. ‘Various issues such as pay and gender equality and how workers are treated in other parts of the world are also concerns.’

Hodak says directors are beginning to develop fatigue related to ESG issues, as suggested by a recent PwC study, but it’s something they’ll have to overcome because investors are not letting go of these concerns.

Executive compensation continues to be a matter that animates investors. In particular, there are concerns over performance and the inequality many investors believe is brought about by ever-escalating executive compensation versus the stagnant remuneration of the average worker. Pay gets significant pushback from a portion of investors no matter how well some firms perform, Hodak says.

‘The single-most agitating thing for investors regarding compensation is when a company pays a lot of money for a CEO who hasn’t performed,’ he comments. ‘Pay-for-performance disconnect is always a lightning rod.’

Investors are also concerned about disclosure – and not so much that there isn’t enough disclosure: the problem is actually the opposite. Disclosure has become overly complex and investors aren’t getting a clear picture, making it a barrier to transparency.

It’s an area where Farient sees a dilemma, Hodak says. ‘On the one hand, the biggest driver of complexity is the proliferation of performance shares: long-term incentives awarded based on performance,’ he explains. Those are proliferating because investors are asking for them. At the same time, however, performance shares are making incentive plans more complicated, and there are investors pushing back on whether or not the complexity is worth the trade-off of making disclosures so hard to understand, Hodak adds.

Boards need to use as much plain English as possible in their disclosures, which need to be made understandable in a way that links their programs – such as governance structure and executive compensation – with the firm’s activities, while addressing concerns being brought up by investors, Hodak adds.

Understanding investor concerns and how they relate to your business activities is necessary to develop a narrative for board members to use when responding to those concerns, according to Hodak. He says investors want a discussion partner who can actually do something about their concerns, such as a chairman or CEO. These people need to be open and accessible to investors. He adds that firms should shy away from boilerplate language in their disclosures, because it irritates investors.

‘There is a lot of disclosure that looks exactly like it did two or three years ago, and looks like everyone else’s, and investors get irritated by that boilerplate,’ Hodak notes. ‘It undermines authenticity. When investors see boilerplate language, especially when it seems there might be something more interesting there, they think management is missing an opportunity to tell them what is really advancing the business – or worse yet, that they’re hiding something.’

More broadly, it’s critical to make sure your governance follows best practices, Hodak comments. ‘Make sure you understand that investors want to know the board is composed of the right people, it’s diverse, has a variety of skill and is operating in a functional way,’ he says. ‘Show that the board is keeping management in check and providing active oversight.’

It also helps to have programs that make sense for your company. That way, you have a story to tell investors that can help them understand your actions. ‘Having programs that make sense and are defensible help you tell the story of what you’re doing and lend authenticity,’ Hodak says. ‘If you’re authentically doing the right thing and communicating well, that helps.’

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