Recently published research has revealed new factors for boards of directors to cultivate investor trust in companies. The Edelman Trust Barometer: Institutional Investors surveyed more than 500 chief investment officers, portfolio managers, and buy-side analysts in five countries (the US, Canada, the UK, Germany, and Japan) representing firms that collectively manage over $4.5 trillion in assets.
identifies several new and emerging focus areas for the investment community in
which the board has a direct role:
1. The reputation
of the board itself impacts investor trust.
Boards of directors
have historically operated behind closed doors. If you asked a director whether
they believe their board should have a public reputation, most would respond
with a resounding no. However, the research clearly shows otherwise. Ninety-four
percent of investor respondents said they must trust a company’s board of directors
before making or recommending an investment. Ninety-two percent also agreed that
an engaged and effective board is important when considering a company in which
reputation is most acutely on display during times of severe corporate
controversy or distress, during which the board’s actions come under a public
microscope. Shareholder activism has similarly intensified the spotlight on boards.
A board viewed as entrenched will be immediately vulnerable to public and
personal attack. Beyond investors, employee groups, labor unions, and non-governmental
organizations are also holding boards publicly accountable with increasing frequency.
to the obvious characteristics of expertise and perspective, boards must now
consider several reputational dimensions. A board must be known as truly
independent, actively challenging management to ensure the organization is
pursuing the best course to maximize value, and it must be seen as deeply in
touch with strategy and its impact on society. Additionally, a board must be
known for diverse thinking, with diverse perspectives necessary to anticipate
2. Investors view environmental and social
considerations as important as governance.
focus on environmental, social, and corporate governance (ESG) issues is now
pervasive. According to our research, 89 percent of investors say their firm
has changed its voting and/or engagement policy to be more attentive to ESG
risks, and 63 percent report this change has taken place in the past year. Importantly,
in all five countries surveyed, investors strongly agree that environmental and
social practices are as important as governance when it comes to investment
In the 2018
proxy season, environmental and social proposals were the largest category on
proxy ballots, accounting for 55 percent of all shareholder proposals, with
climate change and environmental issues ranking as the most common environmental
and social proposal topic. Vanguard and BlackRock have both cited climate
change as a priority issue for 2019. Furthermore, 98 percent of investors think public companies are urgently
obligated to address one or more societal issues relevant to their business,
with cybersecurity, income inequality, and workplace diversity as top
Boards of directors must take responsibility for ensuring their
companies are considering impact on society and the environment, proactively
pursuing ways to contribute as positive corporate citizens and communicating
this to the investment community.
3. Investors care
about corporate culture and
expect boards to provide oversight.
the impact that healthy culture and engaged employees have on corporate
performance. Countless examples of corporate crises show the value risk of not
maintaining a healthy corporate culture. Our research found that two-thirds of investor
respondents believe maintaining a healthy company culture and enforcing a
corporate code of conduct at all levels of the company have a great deal of
impact on their trust.
There is no question that boards historically believed that corporate culture was not their responsibility. Thankfully, this is changing. Recent research by PwC found that 87 percent of directors believe that an “inappropriate tone at the top leads to problems with corporate culture.”
Corporate culture has become the province of board oversight, and any board that is not proactively evaluating the health of its company’s culture is neglecting an important asset and possibly cultivating a powerful risk. The NACD emphasized the importance of the board’s role in corporate culture in a recent report, which recommended that “directors and company leaders should take a forward-looking, proactive approach to culture oversight in order to achieve a level of discipline that is comparable to leading practices in the management and oversight of risk….Shareholder communications should include a description of how the board carries out its responsibility for overseeing and actively monitoring the company’s culture.”
4. Investors expect boards to stay ahead of
A board must
be known for having the capacity to steer a company ahead of technology
disruption. Most industries are facing existential threats brought on by
technology, creating real and present danger for corporate valuation and
long-term viability. Investors expect boards to have the foresight to guide
management in anticipating and overcoming these threats. To underscore this
point, our research found that 95 percent of investors believe that a company’s
investment in innovation impacts their level of trust, with 62 percent saying
it impacts their trust a great deal.
proactively ensure they have cutting-edge technology expertise among their
ranks, and they must actively challenge management to ensure the company has a
plan to capitalize on technology innovation rather than become a victim of it.
In summary, expectations of boards of directors are rising, not only from the investment community but also across stakeholder groups. Investors, in particular, are prepared to take action if they do not see boards doing enough. Eight-seven percent of institutional investors say their firms are more interested in taking an activist approach, and 92 percent will support a reputable activist investor if they believe change is necessary at a company. Boards should therefore expect activism from any of their investors if they do not proactively embrace these issues and ensure their companies are on the right track.
Lex Suvanto is Global Managing Director of Edelman Financial Communications & Capital Markets.