Institutional Investors Sharpen ESG Engagement Goals: BlackRock, NYC Comptroller’s Office, Segal Marco Advisors

Following a ramping up of engagements with corporate executives on such issues as board diversity, climate change, human capital management and pay equity, investors are narrowing their goals in engagements with companies.

Institutional investors are honing their approaches to engagement on issues ranging from the composition of corporate boards to health care benefits for employees at companies located in regions racked by opioid addiction.

Among smaller institutions, investor stewardship officers have led a concerted effort to file shareholder proposals tailored to specific companies to spur dialogue with corporate executives, while larger investors have pressed a “dialogue first” approach with companies. At a recent CleanTechIQ event, investor representatives described their approach to engagement.

“We run the gamut,” said Maureen O’Brien, vice president at Segal Marco Advisors.

The firm works with benefit plans and represents about $500 billion in assets and its clients typically owns 5% or less of a company’s stock, collectively. Therefore, O’Brien said, the firm uses shareholder proposals to create a conversation – and to prompt a board to have a conversation about a proposal – as well as letter writing campaigns and scheduled calls with corporate executives at companies with whom the firm has a standing relationship.

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Similarly, the New York City Comptroller’s Office, investment adviser for the five pension funds for public employees in the city, has filed up to 120 shareholder proposals in a single year, said Millicent Budhai, director of corporate governance. In 2019, the funds submitted between 50-60 proposals to companies and regularly engages each year with executives from Pfizer, Bank of America and Wells Fargo. In addition, said Budhai, the funds reach out to companies when media articles describe bad behavior by executives to engage on corporate culture issues.

At BlackRock on the other hand, the firm refrains from filing shareholder proposals and typically doesn’t vote against management, Jessica McDougall, vice president in investment stewardship and corporate governance. BlackRock is the largest global asset manager with $6 trillion under management.

“For us, engagement is everything,” McDougall said at the event. “That constant relationship and open dialogue is something we prioritize as a team.”

Board Diversity Takes Center Stage

While institutional investors of different stripes are focused more intently on engagements with companies, different funds are taking varying approaches. For instance, Budhai noted that among the five NYC pension funds, each has “its own personality” with regards to engagement.

Still, despite the differences from one investor to another, similar themes have emerged.

Among all three investors for instance, board diversity as an engagement topic has taken on greater urgency in recent years.

O’Brien said the funds she works with have been focused on nominating and corporate governance committees’ recruitment processes and ensuring that those committees are interviewing diverse candidates when they search for board members.

One client, the Philadelphia Public Employees Retirement System, submitted seven shareholder proposals last year asking boards to adopt a Rooney Rule type approach to nominating board members in which gender and racially diverse candidates are interviewed every time a board seat opens. Four companies adopted the rule and the three remaining adopted additional language about diversity in the boards’ nom-gov committee charters.

In addition, O’Brien said, every single company added at least one woman to the board during the time period in which the funds were engaging with the companies.

In the same vein, the NYC funds sent letters to 151 companies that the funds had previously engaged with on proxy access and engaged with about 80 of the companies about adopting matrix disclosures describing directors’ skills, experience, gender, race and ethnicity in proxy statements.

According to data from ISS Analytics, 45% of new board seats filled at Russell 3000 companies were taken by women directors, compared to 12% in 2008. Ethnic diversity, however, hasn’t seen the growth that gender diversity has; 15% of new directors appointed last year are ethnically diverse, ISS reports.

Major pension funds have also increasingly pushed diversity and inclusion initiatives, seeking more hiring of disabled and underrepresented workers. Last spring, pension funds in California, New York and Oregon called on their portfolio companies to enhance their hiring practices to promote such diversity.

Additionally, there is a growing set of products available to institutional investors that have diversity in their investment mandates. For instance, Calvert Impact Capital now leads the private debt strategy for the Equality Fund, a gender lens investment fund dedicated to women’s organizations. The World Bank’s International Bank for Reconstruction and Development issued a sustainable development bond with a focus on investment in women and girls.

Opioids and Executive Comp

Issues related to the opioid addiction epidemic in the U.S. have also taken root in engagement priorities. Part of the challenge in addressing social issues such as opioids however, is that companies don’t want to be viewed as first movers on issues before their peers take action, O’Brien said.

Companies “don’t want to be so far out in front [they] fall off a cliff,” she said. At the same time, investors are making their engagement discussion topics increasingly more specific.

According to O’Brien, one recent issue of focus in the opioid discussions is about the way metrics are calculated for the purpose of evaluating executives’ performance goals for cash bonuses or long-term incentive plans. Earnings per share is a common metric, O’Brien said, but EPS for financial reporting is often different from EPS used to evaluate executive compensation. Boards typically exclude legal costs and at companies such as AmerisourceBergen, Cardinal Health and McKesson which manufacture and distribute opioids, companies are making appropriate statements and taking positive steps, but O’Brien said that it appears they’re insulating executives from financial penalties that shareholders will bear the brunt of if the companies need to pay out settlements.

McDougall described an engagement with a company that centered on human capital oversight and opioid issues. The company, an industrials and materials firm based in Ohio, discovered issues with abuse and overdose among employees and in the communities in which the firm operates. The company responded by providing additional education to employees and working with the Mayo Clinic and the employees’ insurance provider to make alternative forms of pain management available. The steps the company has taken are expected to address the issue of employees’ missing days of work due to health problems and the problems of family members.

“This is a company stepping in for what might be a social issue, but in reality is a business issue as well,” McDougall said.

Other issues that have risen to the fore include sexual harassment and misconduct among CEOs and C-suite executives and board oversight of international investigations into allegations of misconduct, O’Brien said. Budhai said the NYC funds have also focused on gender pay equity and have asked companies to disclose their adjusted gender pay gaps, and existing policies or new proposals in place to promote more women into senior roles. The NYC funds have also submitted shareholder proposals asking companies to provide Equal Employment Opportunity Commission data on employees to investors. Institutional investors have recently taken an even greater interest in employment principles and broader workforce trends.

Indeed, Blackrock announced this year that it would seek to discuss human capital management oversight with companies in engagements.

“We’re seeking to better understand how companies are positioning themselves as a best-in-class employer and how they’re evaluating the employee base as a long-term asset of the firm,” McDougall said. While there is no “set rubric” for success, McDougall said BlackRock wants to understand how companies set corporate culture and the traits of companies that have diverse, stable workforces, particularly in talent-constrained industries.

Budhai said the NYC funds have engaged with Ford Motor Co., General Motors and General Electric to discuss the companies’ setting goals that are consistent with the global climate change agreement known as the Paris Accord.

At this point, O’Brien said, most companies aren’t willing to immediately implement investors’ suggestions, but they’re extremely willing to engage and hold discussions.

“In 2011, [if you reached out for an engagement] you weren’t guaranteed to get a response,” she said. “Now, if a company doesn’t respond – that’s what stands out.”

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