Institutional Investors Show Displeasure with Boards

Big investors are losing patience with unresponsive corporate directors, and they're showing it with their votes.

Shareholders have withheld 20% or more of their votes for 102 directors at S&P 500 companies so far this year, the most in seven years, according to ISS Corporate Solutions, a consulting firm specializing in corporate governance. While largely symbolic, the votes at companies such as Wells Fargo & Co. and Exxon Mobil Corp. are recognized as signals of displeasure and put pressure on boards to engage.

“Institutional investors are becoming more actively involved in communicating displeasure through their votes,” said Peter Kimball, head of advisory and client services at the consulting firm, a unit of Institutional Shareholder Services. “Voting against directors at large-cap S&P 500 companies is a way for an institution to send a signal to other, smaller companies about the actions that they don't like. That feedback trickles down.”

While the Trump administration moves to reduce regulatory pressure on companies, big institutional investors are moving in the opposite direction. State Street Global Advisers and BlackRock Inc., for example, are increasingly taking an activist approach, calling for changes in diversity and corporate responsibility.

“Part of this is really the shift in investors to focus more on board quality,” said Rakhi Kumar, who leads environmental, social and governance investment strategy at State Street. “Board responsiveness is a key reason why shareholders will hold directors responsible. If engagement isn't working and boards aren't being responsive to our feedback, then we take action.”

State Street voted against 731 directors in 2016 and expects a similar number this year, after rejecting 538 in 2015, Kumar said. No longer are investors just “checking a box” to support directors, she said. State Street is encouraging companies to refresh their boards to get new and more diverse members.

The bank overhauled its investment strategy in 2013 to become more activist. This year, State Street received a wave of positive publicity after it unveiled the “Fearless Girl” statue on Wall Street. In conjunction with the art project, the bank also issued a fresh call on 3,500 companies to add more women to their boards, particularly those with no female members.

Pay Say

Wells Fargo's board faced pressure from investors because of its failure to prevent a scandal that led to the bank being fined $185 million by regulators in September for opening retail bank accounts without customer approval. Exxon Mobil took heat over its stance on global warming and engagement with investors. The entire board at Wells Fargo received less than 80% support this year, including four with less than 60% support. At Exxon Mobil, two directors received less than 80% support: lead director Steven Reinemund and Kenneth Frazier, who is chairman of board affairs committee.

Since 2011, companies have been required to hold a nonbinding vote at least once every three years, usually described as the “say on pay” review, in which investors can demonstrate their support, or lack thereof, for a company's compensation practices. Prior to that year, investors would often vote against directors on the compensation committee to show their displeasure.

A vote of less than 80% is meaningful because the median level of support for all directors is still about 99%, according to ISS data. The higher number of directors receiving low support this year is significant because “no” votes dropped off after the rule change in 2011, Kimball said.

“Investors are getting a little bit more impatient in some cases, and the Wells Fargo situation was a bit of a wake-up call,” said Ken Bertsch, executive director of the Council of Institutional Investors, a Washington-based nonprofit that advocates for shareholders' rights. “They are trying to be a little more forceful.”

Bloomberg News

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