Modern boards are under a lot of pressure. They must represent shareholders, work with management, and perform all sorts of compliance duties. All of their various stakeholders have demands and desires, and their goals often conflict, making the job in some ways a no-win. Here are some of the key areas and players that put pressure on boards.
The glamor boys of the investing world, activist hedge funds are renowned for taking small stakes in underperforming companies and then pressuring their boards to sell or change strategies in a way that will pump up the stock price (at least in the short term), at which point they sell for a tidy profit.
When an activist investor arrives on the scene, it’s usually bad news for the board. These investors will threaten a proxy fight if they don’t get their way, which can result in directors losing their positions to rival candidates backed by the activists. It’s not unusual to see groups of activists converge on a company, wolf-pack style, if they smell blood. And make no mistake, activists are successful at changing boards. In 2018, activists won a record 161 board seats, up 56% from the year before.
Still mostly a US phenomenon, activism is going global. European companies accounted for 23% of those targeted, while 12% were headquartered in Asia. Some of the biggest names and their prey:
From climate change, plastic pollution, and gun control to pay equity, political-spending disclosures, and sustainability reporting, ESG investors use the power of the ballot to pressure boards to make their companies better citizens. The results of those resolutions are non-binding and rarely garner majority support, but they’re having an impact, nonetheless.
Relative to other parts of the investor community, the ESG world is loosely organized and somewhat rag-tag—a compendium of organizers, religious groups, socially conscious nonprofits, progressive smaller investment funds, and, increasingly, larger investors interested in the sustainability of earnings. Some of the players include:
Large institutions want returns now. But they’re increasingly concerned about ensuring that companies’ business models are sustainable enough to generate profits for pensioners and IRA holders 40 years from now. Among the most notable players in the space:
Investors vote on more than 40,000 issues per-year—so many that even the largest can’t keep up with it all. Enter the proxy advisors, who earn their keep as outsourced research arms for investors and have played a key role in getting boards to embrace best practices in areas like pay-for-performance, transparency and boardroom diversity.
The firms review corporate proxy statements and make voting recommendations on everything from director elections to approving a big M&A deal.
Their influence on the relationship between boards and shareholders is enormous. They’re a source of controversy and consternation for many boards, which resent the proxy advisors’ power and formulaic approach to governance matters, but also need to win their support.
To critics, they’re quasi-regulators who have too much power over the boardroom. A growing movement in Congress would require the firms to register with the SEC and allow companies to fact-check their ratings before they’re published. The firms and big investors are pushing back. Two players control 97% of the market:
From the Sarbanes-Oxley Act to Dodd-Frank, US lawmakers and regulators have spent much of the past two decades setting more (and tougher) requirements for boards, and there’s no reason to expect things will get easier going forward.
The US Securities and Exchange Commission expects boards to play the role of management watchdog. That job includes everything from basic financial reporting and risk-management oversight to setting the right cultural “tone-at-the-top” to overseeing and monitoring cybersecurity efforts. In just the past year, it has issued dozens of orders penalizing companies for cybersecurity missteps.
Other regulatory agencies can get in on the action as well. In one notable example, the Federal Reserve Board, a banking regulator, imposed growth limits on Wells Fargo $WFC until the governance and risk-management processes deemed responsible for its phony-account scandal are fixed—and forced the Wells board to replace four directors.
The same applies in virtually every other market, where governance codes and responsibilities are constantly being revised and updated.
Sarbanes-Oxley and Dodd-Frank set new standards for boardroom independence and accountability. A corporate failing can also lead to more direct lawmaker scrutiny of the board’s actions and response—especially if it involves the public. Wells Fargo’s phony-account scandal, Equifax’s data breach, and Mylan’s exorbitant price hikes on EpiPens all led to the top brass being hauled before a high-profile congressional committee.
Don’t underestimate the power of political grandstanding when it comes to the board. The latest legislative effort—the Accountable Capitalism Act introduced last August by US senator Elizabeth Warren—would make all corporations with annual revenue of more than $1 billion subject to a federal governance regime. Among other things, the bill would mandate that at least 40% of directors be elected by employees and that boards consider the interests of all stakeholders—including employees, customers, suppliers, and communities—not just shareholders.
State legislatures are getting in on the act as well. In one of the more noteworthy efforts, California in 2018 passed a law requiring that all boards of public companies headquartered in the state include at least one woman.
As large corporations become more powerful, another type of activist—do-gooders focused on environmental, social, and governance (ESG) objectives—has grown in numbers and influence. One estimate pegs the size of the space at $20 trillion.
There’s a lot of talk about the “Big Four” institutional investors—BlackRock $BLK, Vanguard, Fidelity, and State Street $STT—who are among the biggest shareholders in pretty much any company. Large pension funds, including the California Public Employees’ Retirement System, fit in this group as well. They share a key feature: an inability to stock-pick, because they own parts of almost every company. Many of their most-popular alternatives are index funds.
