Boardroom skills and experience will be the key issue for investors in 2018, according to new research.
Morrow Sodali, the corporate governance consultants, found that 59% of investors consider skills and experience in the boardroom their biggest ESG (environmental, social and governance) focus for this year.
Climate change is the second most important at 54%, while risk management and opportunities comes in third, at 41%.
Cynthia Alers, head of Morrow Sodali UK, told Board Agenda that the 59% represented “exponential growth”.
She said investors were increasingly looking at three areas when looking at the boardroom and its skills: whether the boardroom is providing the right level of challenge and scrutiny; what the individual skills of board members are and how they come together as a whole; and how board decisions align with strategy and performance.
Morrow Sodali’s survey questioned 49 investment institutions with assets totalling $35trn.
Alers said many boards once offered only passing challenge to business plans before nodding them through.
“That is starting to change,” said Alers. “With [events like] Carillion there are questions: where was the board, was there sufficient scrutiny?”
Ayers said investors were becoming much more active in their approach to corporate governance. She said this was being driven by recent scandals but also by a switch to placing assets in passive funds.
“The only way you can influence the valuation of a company if you are a passive investor is through corporate governance,” said Alers.
She suggested boards may not be aware of how much of their company’s capital is held in passive funds, and questioned the level of preparedness in boardrooms for activist investors.
“I know boards go through a crisis plan and risk management, but I wonder how many have vulnerability to activism on their agenda,” said Alers.
Morrow Sodali also found that 68% of the investors questioned placed a “high” degree of importance on the quality of disclosures on business strategy”, and 66% said the composition of the board was of “high” importance.
When asked which factors increase their confidence in the board’s “refreshment process”, 59% said the quality of appointments was the most important, while 54% said engagement with shareholders.
Forty-nine percent of investors said that ESG and sustainability were now “integrated” into investment decision-making.
Morrow Sodali’s report stated: “Investors increasingly recognise ESG and sustainability as material to long-term financial outcomes.
“Investment Managers are ever more influenced by clients’ objectives and stakeholder considerations as the focus on environmental, social and governance (ESG) issues continues to attract significant attention.
“More respondents gradually follow the Sustainability Accounting Standards Board (SASB) guidelines for investors, UN Sustainability Development Goals and recently endorsed Task Force on Climate-related Financial Disclosures (TCFD) recommendations.”