CNBC Report: More activist investors to focus on corporate governance and executive pay

This week CGLytics CEO discussed the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals that activist investors are broadening their focus.

07.20.2020

CGLytics CEO, Aniel Mahabier, discusses the increase in activist investor activity with CNBC Street Signs. New research from CGLytics reveals the growth in the number of activist campaigns and how activist investors are broadening their focus.

Increase in activism

The CGLytics report Activist Investors Broaden their Focus analyzes the number of activist campaigns carried out over the previous four years and deep dives into the increasing areas that are attracting activism.

During the interview with CNBC, Aniel notes that shareholders are beginning to focus on areas such as diversity and performance. And, even though there has been an overall increase in the number of activist campaigns this year, not all of them have been successful.

The changes we are seeing during the pandemic, are that activists are focused on improving corporate performance. Having the right board composition and board diversity are the areas activists have been focusing on. Culture is another area where we have seen activists putting more focus on to improve corporate performance. – Aniel Mahabier, CEO of CGLytics

Regional shift in activism

The research report notes that now activist investors are finding a lot of opportunity in APAC, but not so much in continental Europe. The question is, do we expect this trend to change, and if so, when?

Social, cultural, and economic factors play a big role, along with the European market being highly regulated. This doesn’t provide a lot of opportunity for activists to play a role. I expect to see a marginal change taking place over time. – Aniel Mahabier, CEO of CGLytics

Executive pay

On this topic of executive pay, CNBC recalls that there has been a lot of focus from activists. Shareholder have objected to senior salaries in the past, even so companies have continued to pay out. During the pandemic, these senior salaries have been cut, and in some cases, granted in stock options. What are activists going to do with compensation?

A focus area of activists is to make sure executive pay is in line with the company performance. The median of CEO pay has risen, regardless of companies’ CEOs and Directors taking a pay cut. This is on both the S&P 500 and FTSE 100. We expect to see more focus on CEO pay in the upcoming proxy season. When it comes time for the AGMs in 2021, reflecting the 2020 performance year. – Aniel Mahabier, CEO of CGLytics

Source: CNBC Street Signs Europe

Board diversity

CNBC mentions about the motivation to change the makeup of boards, and that the representation of women on boards on the FTSE, is abysmal (still remaining below 30%). Will boards be motivated to improve diversity, due to the pandemic and the Black Lives Matter campaign?

The activist landscape is changing. We used to have the traditional activists playing a big role. Now you have passive institutional investment managers changing their style and becoming more active.

If you look at the BlackRocks and the Vanguards of the world, they are focusing on boards being composed with the right mix. Diversity plays a big role. Not only from a gender perspective, or a race perspective, but making sure you have the right skill set in place, the right tenure, and the right age diversity. It’s a number of things that make a board very effective, and I expect diversity to continue to be a focus going forward. – Aniel Mahabier, CEO of CGLytics

Companies need to be prepared for activist investors and engage with shareholders on a more timely basis. Proactive engagement between investors and companies will prevent activist campaigns going forward. Companies need the right information and tools to ensure their corporate governance risks are reduced and any deficiencies are quickly resolved.

Contact CGLytics and learn about the governance tools available and currently used by institutional investors, activist investors and leading proxy advisor Glass Lewis for recommendations in their proxy papers.

 

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise, and skills.

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Diversity on the Board? Metrics Used by Fortune 100 Companies

Examining the diversity of Fortune 100 boards and questioning the metrics currently used to disclose diversity. Are Fortune 100 companies providing the complete picture?

06.29.2020

This article examines the diversity of Fortune 100 companies’ boards, and questions the current metrics used to disclose diversity of board members. Due to the lack of uniformity of diversity disclosures, is the picture painted by some companies comprehensive enough to truly show diversity on their board?

The topic of diversity has grown in importance over the past decade. Large companies are spending time and resources discovering how having a diverse board of directors is affecting their company’s image, perception, and profits. Many companies focus on appointing employees with different education, experience, race, and backgrounds. This is illustrated through companies’ diversity statements. For example, Amazon.com, Inc. in their 2019 Proxy states,

“We take seriously our commitment to diversity and respect for people from all backgrounds, including gender, race, ethnicity, religion, sexual orientation, disability, and other dimensions of diversity, which are enduring values for us as reflected in a number of Company policies, including the Amazon Global Human Rights Principles.”[1]

 

Even with inclusive diversity statements, such as Amazon.com, Inc.’s, when calculating how diverse companies’ boards are, two main diversity metrics are used: gender and race. While acknowledging the positive effects of having a diverse board and showing how diversity is being valued in a company is important, examining how transparent companies are with their diversity metrics shines light on a company’s commitment to diversity.

Why is Board Diversity Beneficial for Companies?

The decisions that the board of directors make for corporations are critical for their success. The board impacts how the company is run by making crucial decisions on executive pay, dividend policies, setting yearly goals, and conducting any other business that concerns shareholders. Having a board composed of people with different backgrounds and experience will enrich conversations and allow the board to approach problems with new perspectives and ideas.[2]

Companies should actively try to understand and represent their clients and customers. In doing so, better marketing decisions and tactics can be set. For example, “Having a diverse board can help you better understand purchasing and usage decisions, particularly as studies have found that women drive 70-80 percent of purchasing in the United States.”[2]

CGLytics data of board diversity reveals the percentage of gender diversity and nationality dispersion on boards of Fortune 100 companies.

As depicted in the following graphs, Fortune 100 company boards are composed of mostly American men. Unfortunately, we can not determine percentages of race within these companies because very few companies disclose information on race/ethnicity. The missing data and the lack of transparency from these companies questions their commitment to diversity.

Fortune 100 diversity on boards
Source: CGLytics Data and Analytics

Reporting Diversity

Based on the Fortune 100 companies’ 2018 and 2019 proxy statements, 23% of the Fortune 100 companies do not report information on diversity and the other 77% report the information using different metrics.

The reporting companies focus on gender alone, combine gender and race/ethnicity, or on nationality. There is no uniformity between companies or industries.  While most companies have statements in their proxies outlining the value of diversity and how they define it, the statements are not always represented in the graphs or numbers that break down their board diversity.

This is clearly shown in Caterpillar Inc.’s 2019 Proxy statement. The company lists one of their key characteristics of their board as being diverse of “race, ethnicity, gender, cultural background or professional experience.”[3]  This diversity statement implies that the board would be diverse. But it is unclear if it is as they combine gender and race in their data. In their governance highlights, Caterpillar Inc. lists their board as 45% diverse (gender and race combined).[3] By combining the percentage of gender and race, and not providing a breakdown of the directors’ backgrounds, it is difficult to determine if the board is diverse in race, ethnicity and gender.

Lack of uniformity when reporting diversity

When examining Fortune 100 companies for diversity, we find that it is difficult to compare companies’ information due to the lack of uniformity of how they are reporting data on board diversity.

For example, Delta Air Lines, Inc. and American Airlines Group Inc., both in the same industry, report their diversity metrics differently. At first glance, both companies report roughly equal percentages of diversity (38.5% and 40% respectively). However, American Airlines Group Inc. displays their information by separating gender and race/ethnicity.

Diversity of boards: Delta Air Lines and American Airlines
Source: Company disclosures found in the CGLytics software platform

Why would a company combine race/ethnicity and gender in their diversity graphs? One reason could be to increase the appearance of a diverse board.

Hypothetically, if Delta Airlines, Inc.’s board consisted of four white women and one non-white male and mirrored the American Airlines Group, Inc.’s diversity chart, it would show 38.5% diversity with 7% racially/ethnically diverse and 30.7% gender diverse. While the 30.7% gender diversity would be high for their industry (as shown in the follow graph), the racial/ethnically diversity would be low. This example could be switched with gender diversity being low and would highlight a similar problem. However, without clear diversity metrics, consumers and shareholders are left questioning Delta Airline’s commitment to diversity, which could result in a loss of business.

By combining the percentages of gender and racial diversity, Delta Air Lines is hiding who is represented on their board of directors. American Airlines Group, Inc. clearly shows their shareholders, investors, and the public that they value diversity and are prepared to make well informed decisions. What does clear diversity metrics look like?

Fortune 100: Women on boards by sector

Percent of women on Fortune 100 boards by sector
Source: CGLytics Data and Analytics

Transparent diversity metrics should give the consumers and shareholders a comprehensive background of the members on the board. This should include race/ethnicity, gender, age, and industry experience. These metrics broaden the knowledge of the board, giving the board members the tools to make successful decisions.

This is illustrated in PepsiCo Inc.’s 2019 proxy statement. Their diversity statement is clear and backed by their diversity percentages. It states, “Diversity including understanding the importance of diversity to a global enterprise with a diverse consumer base, informed by experience of gender, race, ethnicity and/or nationality”[4]. This is clearly shown in multiple graphs that break down backgrounds of each director.

PepsiCo Inc.’s 2019 proxy statement

PepsiCo Inc.’s 2019 proxy statement
Source: Company disclosures found in the CGLytics software platform

It is recommended for more companies to design their diversity statements and data like PepsiCo Inc. They shared a comprehensive view of their board and proved their board was encompassed with directors of various backgrounds. This provides consumers and shareholders with confidence that the board is well equipped to make the best decisions for the success of the company.

To gain access to Governance Intelligence and Oversight of 5,900+ globally listed companies, contact CGLytics. Within the CGLytics software platform, access 125,000+ professional executives and their skills, expertise and backgrounds for recruiting board members and building a robust, diverse board.

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A diverse supervisory board: This is how to unlock a wealth of talent

Aniel Mahabier, CEO of governance data specialist CGLytics, welcomes the fact that selection committees are using corporate governance analytics to assess the diversity of their own supervisory board. Technology is bridging the gap between the available talent and the knowledge and experience that committees already have in-house.

“Selection committees are looking for the right candidates outside their traditional networks”, says Aniel Mahabier, founder and CEO of governance data specialist CGLytics. Such an alternative approach, for example through the use of data analysis, has major advantages: people with unique experience and unique talent are put on the radar.

In many organizations – listed and unlisted – supervision is far from diverse. A supervisory board with only people of the same generation, background and education cannot properly monitor the continuity of the company in the changing society. Such a homogeneous council cannot sufficiently monitor the interests of the various stakeholders.

An important task therefore lies with the selection committees that are responsible for a balanced composition of the supervisory board. We see that selection committees use our corporate governance analytics to assess and benchmark the diversity of their own supervisory board. For example, to be able to answer questions from international shareholders and when planning succession. For example, they test the current composition against the various international corporate governance codes and sustainability regulations. This contributes to effective management and good risk management.  

Click here to continue reading the full article.

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Gender diversity in Spanish boardrooms

In Spain, the Comision Nacional de Mercado de Valores (CNMV), has put a series of changes to the corporate governance code of public companies under consultation. This is widely regarded as one of the most relevant proposed amendments relating to gender diversity in boardrooms.

In Spain, the Comision Nacional de Mercado de Valores (CNMV), has put a series of changes to the corporate governance code of public companies under consultation. This is widely regarded as one of the most relevant proposed amendments relating to gender diversity in boardrooms.

The new proposal is moving from a “mere” recommendation to a “direct” recommendation of a minimum of a 40% presence of females in boardrooms, significantly up from the current 30%. Besides, the CNMV also acknowledges that the current recommendation hasn’t been given enough attention by Spanish corporates. To address the issue, the new proposal recommends to include executive selection policies and processes in order to promote diversity of knowledge, experience and gender.

Considering these substantial and at the same time exciting changes, I decided to take a look at the current state of gender diversity in Spanish boardrooms, selecting both the IBEX35 and the remainder constituents of the IGBM. The result of the analysis is as follows:

Within the IBEX35, only 3 constituents already meet the new recommendation of the CNMV. Much worse is that only 43% meet the current threshold that has been introduced in 2015, and 20% have less than 20% of females on their board.

Within the rest of constituents of the IGBM (82 corporates), the situation is mixed:

  • • 2 corporates have already achieved real gender parity
  • • 3 corporates meet or exceed the new threshold of 40%
  • • 18 corporates are already above or meet the current recommendation
  • • 59 corporates are below or significantly below the current recommended 30%. Within this group, there are 11 companies which have no females at all in their boardrooms. Following Larry Fink’s latest letter, it is likely that these companies will be facing tougher environments and questioning from investors and stakeholders in the future, as well as higher financing costs.
chart2
Source: CGLytics Data and Analytics

Considering that the current recommendation was set by the CNMV in 2015, it is clear to see that companies will have a challenging future ahead if they want to meet the new recommendation for gender diversity, either via succession planning or boardroom expansions.

In view of the above, how can CGLytics support public corporates’ growing demand for board diversity and effective succession planning, at the required pace?

Whilst at the same time guarantee they achieve a well-balanced board, paramount to maintaining good corporate governance for long-term success?

CGLytics’ Nominations & Governance solution is the answer. Basically, Nominations is a strategic tool through which nomination committees and HR teams are empowered to maintain a pulse on how the board composition of their organisations measures up against peers, investors’ requirements and market standards.

Using Nominations & Governance, nomination committees and HR teams can benchmark the skillset of their boards versus peers and competitors, prepare for investors’ pressure related to board composition, identify the right skills needed now and in the future to best serve the board’s ability to make the right decisions and build a talent pipeline, getting instant access to 125.000+ (including over 20.000 females) global executive profiles of key decision-makers from listed companies, including comprehensive biographies containing employment, compensation, education and extracurricular activities, to search, find, engage and network with the best-quality prospects for boardroom recruitment and succession planning.

Please get in touch should you want to know more.

Would you like to gain instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills?

Or access the same CEO pay for performance insights used by Glass Lewis in their proxy papers?

Request a demo to learn more about CGLytics’ boardroom intelligence capabilities and executive remuneration analytics, currently utilized by world-leading institutional investors, activist investors and advisors.

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About the Author

Francisco Lopez, Regional Sales Director

Francisco Lopez is a senior sales professional with two decades of successful experience in delivering growth to organizations and building long-lasting, profitable and sustainable relationships with clients and stakeholders worldwide. Francisco has developed his career in the market intelligence, information services and technologies industries, having fulfilled senior business development positions at blue-chip organizations such as Nielsen and GfK. Prior to joining CGLytics, Francisco was the global head of the Industrials sector at a global supplier of SaaS solutions for third-party risk & performance management. Francisco holds a Master’s degree in Business Administration from the Complutense University of Madrid.

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About the author

Edna Frimpong: Lead EU Research Analyst

Edna holds a degree in LLM Finance and Law Programme from the Duisenberg School of Finance. In addition she completed her Bachelor’s Degree in Administration in Accra, Ghana. She gained work experience during her internships as a research analyst at Sustainalytics and as a finance and business development intern at Carnomise SAS.

Good corporate governance begins with good data

Effective corporate governance starts with having the right information. In an ever-changing corporate governance landscape of continually increasing, publicly available information, shareholder involvement, activism, ongoing media campaigns and continual changes to governance regulations, having the right information from the start can be the difference between success and ongoing shareholder revolt.

Effective corporate governance starts with having the right information. In an ever-changing corporate governance landscape of continually increasing, publicly available information, shareholder involvement, activism, ongoing media campaigns and continual changes to governance regulations, having the right information on a timely basis from the start can be the difference between success and ongoing shareholder revolt.

This article first appeard in Ethical Boardroom, the premier subscription based magazine and website that is trusted for its in-depth coverage and analysis of global governance issues. Click here to access the original article.

Boardroom diversity, fair executive compensation, compliance to regulatory requirements, how companies compare against their peers and competitors and how they are perceived by investors and proxy advisors, needs to be thoroughly understood by boards of companies to stay ahead.

With heightened scrutiny of governance practices in the post-financial crisis era, it is now more important than ever for companies’ boards and their executives to be fully prepared, with the same data and information as investors and proxy advisors, before beginning engagement to avoid reputational and governance risk.

CGLytics, the leading provider for global corporate governance data analytics, provides real time data and a suite of powerful benchmarking tools to help companies and their boards with data- driven insights for sustainable practices and effective oversight. These tools support boards in making smarter, more timely and better-informed decisions.

The great debate of executive compensation

Investors over the past 12 months have continued to pay attention to, and even asked more questions about, the pay practices of companies and rewards offered to their CEOs and directors. Add to this the requirements set out in the revised European Shareholder Rights Directive (SRD II) to increase transparency of the company’s pay practices, including CEO to average employee pay ratios, CEO pay relative to company’s performance and extended say on pay rights of shareholders, companies should be sitting up and paying close attention.

During the last proxy season, executive pay was heavily and effectively challenged. Shareholders repeatedly voted down advisory remuneration reports and questioned short-term remuneration plans, urging companies to bring pay into line with performance. Many remuneration-related resolutions were voted down on the grounds of misalignment.

The UK, in particular, was at the forefront of shareholders concerns over excessive pay. To address these concerns, the Financial Reporting Council (FRC) issued a Revised Corporate Governance Code in July 2018, which encouraged directors to exercise independent judgement and discretion when authorising remuneration outcomes, by taking into account company and individual performance along with other circumstances.

Executive compensation data available in the CGLytics application

CGLytics carried out a proxy review with data from its extensive, global governance database of FTSE 100 companies and their pay practices. The study revealed that in 2018, 33 companies in the index sought a binding shareholder approval for their remuneration policies. Generally, investors questioned the earning potentials in short-term incentive plans, for example Rentokil Initial plc’s decision to increase the annual bonus from 100 per cent to 150 per cent cost the board a dissent of around 25 per cent on their remuneration policy. In addition, shareholder revolts were seen regarding remuneration reports where there was not enough clarity about contractual entitlements, as seen in the case of Royal Mail’s retiring CEO Moya Greene and new CEO Rico Back.

In other markets, shareholders became increasingly involved in company strategy, as seen in the Dutch AEX study carried out by CGLytics. Of the past years’ proposals to amend executive and supervisory directors’ remuneration, the majority encountered criticism and some were withdrawn prior to the AGM, or resulted in a large number of votes against.

“WITH HEIGHTENED SCRUTINY OF GOVERNANCE PRACTICES IN THE POST-FINANCIAL CRISIS ERA, IT IS NOW MORE IMPORTANT THAN EVER FOR COMPANIES’ BOARDS AND THEIR EXECUTIVES TO BE FULLY PREPARED”- Aniel Mahabier, CEO of CGLytics

To increase transparency and truly understand how stakeholders, including proxy advisors, are viewing executive compensation and predicting how they are going to vote, companies and their boards need access to, not only information, but also data and tools that allow them to instantly compare their company to their industry peers’.

CGLytics’ extensive database hosts more than 10 years of global compensation data and is driving good corporate governance practices by increasing CEO pay transparency and helping companies to be more prepared than ever before.

Using the same solution as leading proxy advisors and institutional investors, companies can replicate the peer groups of proxy advisors and investors with CGLytics’ customisable peer group modeler and easily perform a pay-for-performance alignment review. This empowers boards to know exactly what investors are looking at and scrutinising prior to engagement, be proactive with their reporting and make sure there are no hidden surprises come AGM time.

Diversity in the boardroom: where are all the women?

With companies, their boards, investors and governmental stakeholders all agreeing that goals that promote long-term value creation are imperative to corporate governance health, the issue of diversity comes into play. Why? Because having a diverse board is linked to long-term value creation.

A diverse board of directors with different ages, genders, nationalities, cultures, skills, experiences, tenure and backgrounds certainly creates new and interesting dialogue around best practices for long-term value creation and brings fresh ideas to the table.

With the speed of change happening today, driven by technology innovations, a variety of ideas, perspectives and knowledge is mandatory to keep up and make the best decisions by taking into account worldly happenings. And government and regulatory bodies are taking note. In particular, during the past year, the US has seen strict regulation changes in some states to even out the gender imbalance in corporate boardrooms.

California was the first state to legally require female representation on boards with the California Senate Bill 826 being passed. The law requires the appointment of at least one female to a company’s board of directors by 2019 and between one and three by 2021, depending on the size of the company. A fine of $100,000 can be expected for not complying. This was shortly followed by New Jersey , which mimicked California’s approach of at least one female director by 2019.

Earlier this year, using CGLytics’ software solution that provides extensive boardroom composition data and analytics, a review was carried out to evaluate the progress made in the US market and likelihood of achieving greater diversity in the coming years. By taking a deep dive into the board composition of S&P 500 companies, it was revealed that even though there is a push from investors for more diverse boards in order to maximise returns, change is not happening as fast as desired.

In CGLytic’s S&P 500 Diversity report it shows that from 2017 to 2018 total female representation on boards grew marginally, reaching 24 per cent, up just one per cent from 2017. In response to engagement with the investor community, as well as the new regulatory requirements, the number of women on boards rose from two in 2017 to three in 2018, showing only a slight increase in efforts being made. However, despite the slow growth in overall female representation, six of the seven companies that lacked at least one female director in 2017 corrected this in 2018.

The report also revealed that bringing younger directors into the boardroom does not only add value in terms of unique perspectives and improved innovation, but also impacts company performance. The findings show that there  is a clear and positive correlation between the number of younger board members and the total shareholder return (TSR).

As many investors continue to encourage and push for boardroom diversity for long-term value creation, it is now crucial for companies to, firstly, see how their boardroom composition, including skills, expertise, age and gender diversity is seen by the outside world. And, secondly, see how their company stacks up against their peers and competitors (see graph below).

Source: CGLytics Data and Analytics

Companies using the CGLytics software-as-a-service platform now have access to boardroom intelligence and can see exactly what their investors and proxy advisors see. Using this intelligence, which includes a skills and expertise matrix of more than 5,500 listed companies across the globe, boards are better preparing for AGMs, implementing effective succession plans and, at the same time, reducing their risk to reputational damage and activist investors.

In addition, having access to 125,000-plus global executive biographies in the CGLytics solution, including more than 20,000 female profiles (both existing as well as upcoming directors), with detailed information of skills, experience, compensation, interlocks and connections, nomination committees can lever new ways of scanning the market for talent, understanding corporate networks and work smarter with their search and HR firms when it comes to succession planning and recruitment. It really is helping companies to look beyond the standard practices and information available by leveraging technology to drive and implement good corporate governance practices and sustain a competitive advantage.

Why data, tools and smart technology are mandatory in the challenging times ahead

As we continue to see regulatory requirements to increase transparency of governance practices, such as CEO pay (through implementation of SRD II) and improve diversity (through legislation not only in the US but worldwide), a trend is emerging of investors becoming increasingly knowledgeable and sophisticated.

Not only are leading proxy advisors and institutional investors choosing to use data and analytics delivered to them from CGLytics, but some are building their own systems to stay informed and take advantage of investment opportunities. Companies need to have access to the same information as proxy advisors and investors, with the same sophisticated tools, in order to assess risks, better prepare for shareholder engagement and avoid potential activism. With knowledge being power, and transparency becoming a mandatory requirement, in the near future companies will have no choice but to use systems, such as those offered –by CGLytics, to keep up with investors and improve their reporting practices.

Board insights available in the CGLytics application

The need to keep up with intel on governance risk exposure was evident during the 2018 proxy season. The season saw record levels of shareholder activism, with some high-level campaigns – notably those of Elliott Management and Icahn Partners – hitting the headlines. Changes to board composition and M&A were the primary aims of these campaigns. A recent study performed by Lazard, shows that activists won 161 board seats in 2018, up 56 per cent from 2017 and continue to name accomplished candidates, with 27 per cent of activist appointees having public company CEO/CFO experience. The message is clear: boards must regularly review their governance vulnerabilities to minimise their exposure to activists, and to review vulnerabilities they must have access to the analytics and tools in platforms such as CGLytics’.

And themes that were established in the 2018 season are likely to continue. Shareholder activism will increase with institutional investors playing a more active role and driving change. It also seems likely that US activists will launch campaigns focussed on European companies. Forcing European companies to have access to global data for instant comparison of not just their country peers, but their industry peers and competitors globally.

To prepare effectively for shareholder engagement and anticipate response, companies and their boards must also be looking at past voting habits and patterns, and resolutions from other AGMs during the season. By looking at the trends of past shareholder voting and keeping abreast of happenings during the current proxy season, boards can spot patterns and predict the outcomes of shareholder voting resolutions.

CGLytics’ platform hosts an extensive database of N-PX filings with voting proposals and resolutions from 2004 onwards, covering 4,000-plus investors with more than eight million data points. With this information on hand, plus the benefit of receiving up-to-date alerts of shareholder voting outcomes, boards remain on top of voting trends and can easily identify investors for a proactive engagement.

The next era in corporate governance intelligence

The pressure on companies and their boards to increase transparency of executive compensation and pay practices, improve age and gender diversity, and constantly assess their board quality and effectiveness will not go away.

As investors and their proxy advisors gain greater insights and intelligence by use of data and smart solutions, companies will need to do the same. Boards need to ensure they are on top of their exposure to governance risks in order to avoid activism at all costs and any possibility of reputational risk – and they need to do this efficiently.

Would you like to learn more about how, you too, can have instant insights into more than 5,500 globally listed companies’ board composition, diversity, expertise and skills? As well as access the same executive compensation data used by Glass Lewis in their Proxy Papers? Click here to learn more.

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How to design your peer group for compensation benchmarking

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The increasing popularity of linking equity compensation to socially responsible practices

Social responsibility is an increasing priority for corporates, reflecting changing pressures from stakeholders and society. In this article CGLytics looks at the trend of linking executive equity compensation to responsible social practices.

Historically, the primary concern of shareholders and company executives has been to deliver returns on investments and ensure that the company meets or exceeds their quarterly earnings expectations. Inevitably this led to a more short-term view with any projects that didn’t contribute to the present quarter / yearly results being at risk of cuts.

However, as some of the leading shareholders continue to embrace their roles in ensuring that companies are held accountable for their impact on both the environment and society, a growing trend has emerged of remuneration committees coming under pressure to link equity and compensation awards to sustainable environmental and socially responsible business practices (E.g. Alphabet 2019 Proxy Statement – Proposal 13).

A number of studies [Project ROI] have been carried out that link social and environmental impact to attracting and retaining customers, increasing revenue and building a vibrant corporate culture, whilst also having significant brand impact in a landscape where simply achieving results may become secondary to the “how” they were achieved.

Linking social impact to executive compensation

One of the most significant hurdles of linking the social impact of a company to the equity based compensation of senior executives and directors has been the attempt to identify  quantifiable measures for what can be a very subjective definition of success.

As the topic has come under more scrutiny there has been a visible appetite for businesses to provide more reporting and demonstrate measures that have been taken to ensure they partake in socially responsible practices. This can include:

  • Auditing suppliers to ensure that they and their subcontractors adhere to the values that they wish to demonstrate,
  • Allocating employee time and resources to positively impact society, or
  • Specific metrics regarding health and safety at work.

An example of this trend is Alcoa. In their 2019 proxy statement Alcoa links 30% of incentive goals to non-financial measures such as safety at work and diversity in the workforce, up from 20% in 2018.

In addition to the individual metrics defined by organizations, there has also been a growing trend of executive compensation being linked to the performance of a company on a corporate responsibility index (e.g. Dow Jones Sustainability Index). By linking elements of incentive multipliers to performance against a wider set of peers and the index, companies are able to not only create quantifiable targets to base awards on but are also focused on ensuring that they take a long term view in order to outperform competitors.

Gathering momentum

By defining these criteria and linking to long term incentives, businesses are more able to demonstrate their roles in a socially responsible business world. The positive financial impact of a socially responsible business is only a relatively recent trend. However, with a growing number of large investors taking an active role in the stewardship and engagement of their assets (Blackrock letter to CEOs), it is a trend that is likely to continue to gain traction.

Conversely, organizations that are perceived to be failing to meet their obligations to society will increasingly impact the brand, reputation, and ultimately the bottom line. Hence companies that traditionally have been focused on their financial results are exploring how they can adapt to the new criteria.

The Glass Lewis Equity Compensation Model

Glass Lewis’ Equity Compensation Model (ECM) is now available exclusively via CGLytics. Providing unprecedented transparency to the U.S. market in one powerful online application, both companies and investors can use the same 11 key criteria as the leading proxy advisor to assess equity incentive plans.

Click here to experience Glass Lewis’ new application.

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How to design your peer group for compensation benchmarking

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Uber: Culture Clash

CGLytics takes a look at the recent IPO of Uber and how negative stories and scandals led to lower than expected interest

Uber launched its IPO on May 10th, with an initial share price of USD 45.00 per share. Despite a potential undervaluation of the business of at least USD 25 billion, Uber failed to attract the attention of investors and only managed to raise USD 8.1 billion. An array of scandals and controversies that the company had to contend with over the past several years may have led to the company’s uninspiring launch. Examples hereof include Kalanick referring to his desirability as “Boob-er”, proven allegations that the company booked fake rides on Lyft’s app, spying on the movements of celebrities such as Beyoncé, and even launching a self-driving program without having obtained the necessary permits. These events eventually culminated in a series of revelations in 2017 that ended with Travis Kalanick stepping down as CEO.

Kalanick and Company Culture

In February a former employee released a blog post in which she detailed her experience working for the company which involved sexual harassment and gender bias. Shortly thereafter the New York Times released an article which described Uber employees indulging in illicit substances, in addition to a manger being fired for sexual misconduct. The article would appear to be the tip of the iceberg and by June that same year over 20 employees were fired due to inappropriate behavior. Founder and CEO Travis Kalanick was also forced to step down amid pressure from investors.

Determined to regain control, Kalanick promised to return to the helm of his company. Kalanick’s super-voting shares, which gave him 10 votes per share, had previously allowed him to drastically influence corporate decisions. This was evidenced when Kalanick spontaneously appointed two new directors without informing the board. These appointments came amidst a lawsuit against Kalanick by venture capital firm, and major Uber shareholder, Benchmark. The VC firm sued for fraud, breach of contract and breach of fiduciary duty. The firm further pledged to reject a critical USD 9 billion investment proposal from multinational conglomerate SoftBank.

Ultimately, Uber’s Board approved a series of changes in order to counter Kalanick’s influence, appease Benchmark, and lock in the Softbank investment. These changes included a reform of the company’s by-laws which implemented a “one-share one-vote” rule and led to an increase in size of Uber’s board from an original 11 members to 17. Two of these seats are reserved for representatives of SoftBank, and three are to be filled by independent directors. Of the 17 board positions available, five remain unfilled. This is in part due to the deal still being in review by the Committee on Foreign Investment in the United States (CIFUS), although the deal is expected to eventually be approved.

Board Size: Bigger Does Not Always Equal Better

Although these reforms were implemented in the hopes of instigating better governance practices, studies have repeatedly shown that companies with a smaller board size (9.5 directors) outperform companies with a large board (14+) by as much as 8.5% in terms of return.  Utilising CGLytics’ governance data and analytics, an examination of the two industries in which Uber operates (Information Technology and Consumer Discretionary) appears to corroborate the correlation between a smaller board size and higher shareholder returns.

Source: CGLytics Data and Analytics

As the legal frameworks for companies leveraging the concept of a “sharing economy” are still developing, much of Uber’s future lies in the hands of market regulators. Many European countries such as Greece, Belgium, and Romania have outlawed Uber from operating in their countries. Moreover, if Uber drivers were to be classed as employees rather than independent contractors, as is currently under debate in the United States, then Uber’s bottom line would be significantly impacted.

Although the company has come a long way since its “Bro-Culture” days, the company’s inability to enforce a professional corporate culture have led to the installation of what may appear to be inconsistent governance measures. Primarily, it has increased the size of the board (which could potentially affect the company’s ability to provide returns to shareholders) in an attempt to counterbalance the influence of the company’s former CEO. The clashes between Softbank, Benchmark, and Kalanick have left an enduring impact on Uber’s reputation, valuation, and governance dynamics, with the company’s share price currently feeling the most pressure.

Get access to the same insights as investors and proxy advisors with CGLytics’ boardroom intelligence capabilities. With easy to use comparison tools and standardised data, instantly perform a governance health check against regulatory norms and market standards.

Corporate Governance Risk Report

About the Author

Jaco Fourie: U.S. Research Analyst

Jaco holds a Bachelor of Science degree in Accounting and Finance from the University of Reading. He has gained experience as a research analyst from his enrollment at the Henley Business School and the International Capital Market Association Centre.

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How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"

2017-2018 S&P 500 Review: Increasing Boardroom Diversity

The CGLytics report, Increasing Boardroom Diversity – 2017-2018 S&P 500 Review, describes the current boardroom composition of S&P 500 companies through comparative data captured between 2017 and 2018, evaluating the progress made and the likelihood of achieving greater diversity in the coming years.

2017-2018 S&P 500 Review: Increasing Boardroom Diversity

Pressure is continuing to build for S&P 500 companies to step up the pace in their board refreshment initiatives in order to catch up with their global peers.

The CGLytics report, Increasing Boardroom Diversity – 2017-2018 S&P 500 Review, describes the current boardroom composition of S&P 500 companies through comparative data captured between 2017 and 2018, evaluating the progress made and the likelihood of achieving greater diversity in the coming years. The report addresses diversity by gender and age – comparing the degree of diversity seen in accordance to sector. The report also reflects on current problems with “overboarding” and how to ensure directors have the availability to serve responsibly.

5 Key Takeaways:

Boards got bigger, with average number of members rising to 11 (from 10 in 2017)

One-third of new appointments were women

All but one company absent a female director in 2017 corrected this in 2018

The average age of all boards increased to 63.5 years old

Data reveals certain companies benefited from adding younger directors to their board

Download the report to learn more.

DOWNLOAD THE REPORT

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How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"

The Gender Barometer in the Dutch Boardroom

This article describes the current state of play of gender diversity in boardrooms of Dutch listed companies (AEX, AMX and AScX) and the prospect to achieve the 30% quota in the Netherlands in 2016.

The Gender Barometer in the Dutch Boardroom

This article describes the current state of play of gender diversity in boardrooms of Dutch listed companies (AEX, AMX and AScX) and the prospect to achieve the 30% quota in the Netherlands in 2016.

DOWNLOAD THE REPORT

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How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"

Waivers Of Mandatory Retirement Ages And Company Performance

CGLytics examines the costs and benefits of waiving the mandatory retirement age for directors, elaborating upon aspects of the S&P 500: Increasing Boardroom Diversity Report.

In today’s competitive corporate landscape, a company’s board refreshment policy should aim to ensure that board agendas are robustly debated with a variety of perspectives present. This multitude of perspectives as an integral part of the organisation’s decision-making bodies has often been termed “cognitive diversity”.

This article seeks to further elaborate upon certain aspects of CGLytics’ S&P 500: Increasing Boardroom Diversity Report, with a particular focus on age diversity within the boardroom, and examines the costs and benefits of waiving the mandatory retirement age for directors. The data included in this report is based on the same data set used in the publication, incorporating board composition data as of year end 2018.

Download Now: Mandatory Retirement Age – A Brief Overview

About the Author

Jaco Fourie: U.S. Research Analyst

Jaco holds a Bachelor of Science degree in Accounting and Finance from the University of Reading. He has gained experience as a research analyst from his enrollment at the Henley Business School and the International Capital Market Association Centre.

Latest Industry News, Views & Information

  • All
  • Blog

Understanding ESG & Annual Incentive Plan

Understanding ESG & Annual Incentive Plan ESG refers to a series of environmental, social and governance criteria taken into consideration by the funds during the investing process. Investing in ESG funds allows shareholders to support companies in transition, that wish to act and develop in a more sustainable and responsible manner. In practice, many indicators … Continue reading “Understanding ESG & Annual Incentive Plan”

Pay for Performance: The Largest Institutional Investors’ View

Pay for Performance: The Largest Institutional Investors’ View   Executive compensation has been one of the trickiest issues within the corporate governance space as of late. Across the board, there seems to be no end in sight to finding the perfect compensation package or philosophy for corporate executives. In this article, we will discuss the … Continue reading “Pay for Performance: The Largest Institutional Investors’ View”

How to design your peer group for compensation benchmarking

How to design your peer group for compensation benchmarking   Given the scrutiny on executive compensation in recent years, it is critical to make sure that your company’s executive pay reflects its performance and aligns with the market. Therefore, it is essential for companies to have an appropriate peer group for performance benchmarking, compensation program … Continue reading "How to design your peer group for compensation benchmarking"