Investors take it for granted that a company’s board of directors is a critical body of decision-makers. But why is the board of such crucial importance, especially for impact investors?
The Role of the Corporate Board
In a publicly traded company, shareholders vote for board members, who are responsible for managing the corporation. The board’s main purview is its fiduciary duty to protect shareholders’ assets and ensure there is an acceptable return. To that end, it also has the ultimate say on everything from executive compensation and stock repurchase programs to financial statements and mergers. Plus, many shareholders tend to grant board members proxies to vote on their behalf during annual meetings, giving the board even more authority.
Thanks to their role as the decision-makers on big issues, board members’ positions on whether to consider environmental, social, and governance (ESG) factors may be of concern to many investors. While company management will likely assess potential ESG risks, from supply chain disruptions to environmental impacts, the board needs to oversee the process.
In addition, impact investors often place particular urgency on board composition, as evidence points to the positive effect board diversity may have on ESG metrics. For example, research by proxy advisory Institutional Shareholder Services (ISS) found that S&P 500 companies with three or more women on their boards outperformed their less-diverse peers on ESG measures. And the longer a company had a diverse board, the more likely its sustainability practices were to improve over time.
Others have pointed out that different measures of board diversity—from race and age to professional background—can play a role in company performance, too.
Engaging with the Board
With all this in mind, how can investors interact with board members and push for issues they care about? At the least, they can write letters, make phone calls, or take part in proxy voting. Another approach is to file shareholder resolutions. Shareholders with at least $2,000 worth of stock in a publicly traded company (for at least one year before the deadline) can introduce a resolution to company management to be voted on at the next annual meeting. According to the shareholder advocacy group As You Sow, several hundred resolutions are filed every year.
Increasingly, more shareholders have been filing ESG-focused resolutions advocating for changes in everything from the use of renewable energy to human rights disclosures as well as board diversity. In 2019, for the third year in a row, environmental and social issues comprised the majority of all shareholder proposals filed. The largest number involved political spending in anticipation of the 2020 elections.
To make an impression, shareholder resolutions do not necessarily need to garner a majority vote or pass. Proposals with more than 10% support tend to get the board’s attention, according to As You Sow. A vote of 20% or more sends a clear message that board members are unlikely to ignore.