A new report from Russell Reynolds provides insight on the need for enhanced board effectiveness and increased emphasis on diversity, equity and inclusion initiatives. And, according to report co-author Jack “Rusty” O'Kelley, Russell Reynolds' managing director of board & CEO advisory partners for the Americas, institutional investors are ready to stop making suggestions to boards and management and start using their voting power to push companies toward concrete change.
The report, entitled 2022 Global and Regional Trends in Corporate Governance, sees institutional investors remaining focused on environmental oversight, reporting and performance. However, according to O'Kelley, investors are taking that concern to “the next level.”
“Now, it's ‘We want to see action. We want to understand what companies are actually doing to not just talk about sustainability, but what they are doing to actually reduce their carbon footprint or plan for a transition to a more carbon-neutral environment over many years,'” he says.
O'Kelley notes that major institutional investors are concerned about trends in these areas for two major reasons: the impact on the businesses they invest in and the increasing demand from their client base for options that are more sustainability-friendly.
To push more companies toward that ESG friendliness, the report indicates that shareholders will be much more assertive, and companies will need to step up shareholder engagement programs to ensure they are addressing their concerns. O'Kelley predicts the emergence of more direct conversations between investors and boards, and investors voting against directors who are not committed to progress around sustainability.
“If boards don't pursue sustainability, large institutional investors will be much more likely to vote against directors,” O'Kelley says. “I think that's going to be the great wake-up call for many folks. Investors are going to say, ‘We've had lots of conversations. We don't see the actions we want, and we're going to vote against you.'”In the area of DEI, the report indicates an increased demand for diversity on boards, as well as in workforces and executive levels, with respondents largely agreeing on diversity's positive effect on leadership, governance and financial performance. While O'Kelley applauds the “dramatic improvement” in gender diversity on boards in recent years, he is clear that ethnic diversity on boards continues to be a major topic of focus for institutional investors. In noting that there are still directors who believe ethnic diversity does not push the needle on the ability to conduct business, he asserts the inability to create an ethnically diverse board as a major hindrance to talent recruitment efforts.
“If you ask in-demand talent, particularly younger talent, they want to see themselves represented on the board because they view that as a very clear reflection of what their opportunities will look like,” says O'Kelley. He adds that young employees of all ethnicities are likely to be skeptical about their ability to thrive and progress in companies that lack a diverse workforce. “You don't want to lose out on all that talent.”
Board Effectiveness
Board effectiveness was also a major focus for institutional investors. According to O'Kelley, institutional investors will be urging boards to focus on quality and effectiveness, including a demonstration of ongoing commitments to self-assessment and refreshment planning. For example, he says, during the COVID pandemic, while many boards were prepared to pivot, others featured board members who were not as ready to contribute, resulting in a stagnation of mission and purpose.
“Many boards struggled during COVID,” says O'Kelley. “Institutional investors saw management teams and directors who did not live up to the expectations of that crisis.”
O'Kelley is surprised by institutional investors' consistent commitment to focus on and get more granular on the issues they feel to be important. Respondents underlined their determination to take action, believing there has been enough talk.
“They feel that they have been very clear and very consistent, and companies and boards should have been listening over the past several years. That was the ‘Aha!' moment. They're pushing harder and going deeper on things they had already been focused on.”
Check out the full 2022 Global and Regional Trends in Corporate Governance report at the Russell Reynolds Associates website.