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2018 Proxy Season Institutional Investor Priorities: Why These Issues and Why Now

Institutional investors don’t just have the potential to steer corporations toward socially responsible policies—they’re making change happen. Ahead of the 2018 proxy season, the EY Center for Board Matters spoke with more than 60 institutional investors with assets totaling $32 trillion to gauge their priorities for this year. It released a proxy season preview highlighting five key issues that matter to institutional investors.

Board Diversity

Board composition is a major priority. Respondents said they value diverse boards, with many pointing to a lack of gender diversity as a problem. In addition to the social implications, investors have a solid basis of financial evidence to justify their concerns about diversity: research shows that companies with diverse leadership fare better financially than those with homogeneous teams.

Some respondents explained that they’d like to see independent voices on boards that can challenge entrenched habits, reflecting worries that boards can suffer the ills of old-boys’ networks if they don’t make room for new perspectives.

This issue has gained urgency in light of the #MeToo movement, which accused many tech and media companies of fostering cultures that tolerate sexual harassment.

Board Expertise

Respondents said they’d like to see more technological and industry expertise on boards. In particular, they raised the issues of cybersecurity and data privacy as areas where directors’ knowledge is essential.

Investors have watched the Equifax data breach, misuse of Facebook users’ data by Cambridge Analytica, cyberattacks on banks, and the $35 million fine the US imposed for the 2014 Yahoo data breach, among many other incidents, and have recognized that boards need specialized understanding of security threats in order to avoid being blindsided by hackers.

The importance of this issue is likely to intensify in coming years as a greater percentage of the world’s population relies on the internet and as digital threats become more sophisticated.

Climate Risk

Investors said they want companies to be more proactive about tackling the risks of climate change. The majority of respondents were in favor of greater transparency and reporting on climate risks. Many respondents also said they support cuts in greenhouse gas emissions, carbon footprint reductions, and anticipating the effects of a low-carbon economy.

The share of respondents prioritizing climate change has tripled since 2016, which parallels the ascent of renewable energy. Research has found that the price of solar panels fell by 50% from 2016 to 2017. As renewable energy continues to become more affordable and as the risks of failing to address climate change become more apparent, companies may need to transition away from reliance on carbon-based fuels to stay competitive.

Human Capital Management

Another priority for investors in 2018 is human capital management. This comprises everything from attracting and retaining talent to maintaining a company culture that engages all segments of the workforce. Companies will need to proactively manage human capital concerns to stay competitive. For example, firms need to ensure that their cultures are not hampered by pay gaps or discrimination, which drive away valuable talent.

Investors pointed out that automation will displace some workers. Other workers will move into new forms of employment, such as gig work. Companies need to evaluate how contingent labor may affect their culture and knowledge management. Firms may find it imperative to invest in worker retraining programs, as required job skills morph in tandem with technology.

Compensation Strategy

Investors are asking companies to reevaluate their compensation practices to verify that they reward good performance instead of reflecting cultural biases. Respondents want companies to hold executives to high standards of ethical conduct and eschew compensation policies that incentivize short-term thinking.

Now, shareholders are waiting to see how companies respond to their concerns in the 2018 proxy season. Voting investors hope that greater attention to these issues will place companies on sounder footing when they’re faced with new and related economic and social changes in the coming years.

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