Making engagement work
It is often said that one key to having an effective shareholder engagement program is having co-ordination between and involvement from multiple key constituencies within a firm.
Governance respondents were asked to rate how often different groups are involved in ESG engagement with investors on a scale from one (never) to five (always). They report that the IR officer/team is most frequently involved in the process with an average score of 3.9, just below ‘very often’.
Governance respondents say their team is next most frequently involved (3.6), followed by ESG/sustainability teams (3.5), the chief executive/chief financial officer (3.1), board members (2.9) and HR (2.5).
Respondents at mega-cap companies more often say IR (4.4) and governance teams (3.9) are part of the process than do respondents at other cap sizes. Those at mid-cap companies report the most frequent involvement of governance teams (4.0). On average, IR and governance teams are said to have less frequent involvement at small-cap companies.
One of the board of directors’ key functions is risk oversight, and governance teams play an important role in enabling them to carry this out. Respondents at mega-cap issuers offer comments including the following when asked how they ensure their board has oversight of ESG issues that are important to investors:
Just over half of governance respondents say they engage with third-party experts who provide advice or guidance to board members on ESG matters. That figure is higher among those at larger companies: around a quarter of governance professionals at small-cap companies say they use outside advisers to help the board with ESG, compared with 64 percent of those at mega-cap companies.
Governance respondents in Europe (63 percent) are more likely to engage with third-party experts than those in North America (47 percent).
A substantial number of governance professionals perceive a lack of complete buy-in on ESG at their company. Thirty-nine percent of governance respondents say they agree or strongly agree that the vast majority of their company is aware of ESG issues and how they fit into its long-term strategy. The same percentage say they disagree or strongly disagree.
The level of confidence is higher among those at larger companies. Roughly a quarter of those at small-cap firms agree or strongly agree that the vast majority of their company is aware of ESG issues and how they fit into its long-term strategy, compared with 57 percent of those at mega-caps.
Governance professionals have a higher degree of confidence when it comes to their board. Overall, 59 percent agree or strongly agree that their company’s board members have a high level of involvement with overseeing ESG. That figure is highest at mid-cap companies (71 percent), followed by 69 percent at large caps, 65 percent at mega-cap companies and 38 percent at small caps.
Overall, more than half (54 percent) of governance professionals say ESG issues come up for discussion in board meetings either very often or always. That figure ranges from 44 percent among respondents at small-cap companies and 45 percent among those at large caps to 64 percent at mid-caps and 65 percent at mega-caps.
Regionally, 70 percent of respondents in Europe say ESG issues crop up at board meetings either very often or always, compared with just over half (51 percent) of their peers in North America.
Less than a fifth (18 percent) of governance professionals say their management or board has discussed offering shareholders a say-on-climate arrangement. This contrasts with interest among investor respondents, 42 percent of whom are in favor of companies they invest in giving them a say. It should be noted, however, that almost a third of governance respondents overall – and almost half of those at mega-cap companies – don’t know whether their board or management team has had such discussions.
Looking at ESG more broadly, 70 percent of governance respondents say investors have asked about environmental issues over the last year. This is followed by the impact of Covid-19 (61 percent of respondents), employee diversity data (60 percent), board composition and effectiveness (56 percent) and executive remuneration (44 percent).
These findings are broadly in line with investor responses, although investors also mention supply chain management/issues among the most frequently discussed topics.
Almost three quarters (72 percent) of governance professionals at mid-cap companies and 85 percent of those at large-cap issuers report being asked about environmental issues, compared with 53 percent of those at small caps and 65 percent of those at mega-cap companies. Large-cap company respondents are also more likely than others to have been asked about Covid-19, board composition and effectiveness and executive remuneration.
Governance respondents were asked when in the calendar year their company has been most likely to discuss certain ESG issues with investors. As with investor respondents, the most common answer is ‘generally across the year’, but governance professionals in general report a more even spread of engagement across the calendar year.
For example, in terms of political lobbying and spending, a quarter say shareholder engagement takes place across the year but almost a third (29 percent) say the topic is most likely to be discussed between October and December and a further 14 percent say it is most likely to be discussed between April and June.
Similarly, a quarter of respondents say their company is most likely to discuss board composition and effectiveness between October and December and a further 15 percent say those talks are most likely to happen between April and June.
Governance professionals were asked to rate the knowledgeability of different constituents of the engagement process on specific ESG topics using a scale of one to five, with one being ‘not at all knowledgeable’ and five being ‘extremely knowledgeable’.
On average they rate their company’s CEO and CFO most highly on the impact of Covid-19 (4.5), followed by executive remuneration (4.4), corporate culture (4.2), community relations and supply chain management/issues (both 4.1). The lowest average rating is for their knowledge of labor practices (3.0).
In rating their own team on ESG, governance respondents on average say their team is most knowledgeable about board composition and effectiveness (4.4) followed by executive remuneration (4.2), corporate culture (4.0), the impact of Covid-19 (3.9) and political lobbying and spending (3.8).
Governance teams say their company’s board members are most knowledgeable when it comes to executive remuneration, with an average score of 4.3. After that, they rate directors most highly for board composition and effectiveness and the impact of Covid-19 (both 4.1), corporate culture (3.7) and health and safety (3.6). They give the lowest ratng for staff retention, hiring and training (3.1) and gender pay gaps (2.8).
Governance respondents rate their IR officer/team’s ESG knowledge most highly in terms of Covid-19’s impact (4.1), community relations (3.9), corporate culture (3.7), supply chain management/issues (3.5) and cyber-security and data privacy (3.4). Governance professionals score the IR function less well in terms of knowledge about employee diversity data (3.0) and gender pay gaps (2.9).
Governance respondents rate their ESG/sustainability team colleagues highest, as might be expected, on environmental issues (4.4). This is followed by community relations (4.0), corporate culture and health and safety (both 3.9) and the impact of Covid-19 (3.8). They rate them less well on gender pay gaps and talent management (both 3.2).
Just like investors, governance professionals tend to rate the HR team/chief HR officer as having most knowledge in areas associated with the role: labor practices, executive remuneration, talent management and staff retention, hiring and training (all at 4.3), Covid-19’s impact (4.2) and racial equality (also 4.2). Similarly, they tend to rate the HR function as having less knowledge in areas less frequently associated with its work: cyber-security and data privacy (2.7), environmental issues (2.6) and political lobbying and spending (2.3).
ESG reports have taken on a growing role as part of companies’ efforts to engage with investors and other stakeholders. Two thirds (67 percent) of governance professionals say their firm now publishes such a report, and the larger the company the more likely it is to do so. Just 38 percent of respondents at small-cap companies say they release an ESG report, rising to 71 percent at mid-cap companies, 81 percent at large caps and 100 percent of mega-cap firms. Those in Europe (81 percent) are more likely to do so than peers in North America (64 percent).
Just over half (53 percent) of governance professionals believe investors have always or very often read the ESG report before engaging. Those at large-caps are particularly confident, with 82 percent saying they believe investors have always or very often read the ESG report.
There is growing pressure from some investors for companies to link at least a percentage of executive compensation to ESG metrics, and 39 percent of governance professionals say their board is considering doing so. Almost as many, however, say they don’t know whether the board is looking at this and 24 percent say it is not.
No respondents at mega-caps say their board is not even considering executive compensation links, but more than half of that group admit they don’t know whether it’s on the agenda. Respondents in Europe (44 percent) are slightly more likely to say their boards are looking at the matter than those in North America (37 percent).
