How Institutional Shareholders Impact Board Strategy

Shelagh Donnelly
5 min read
Is your board shareholder-centric? To what degree do institutional shareholders, in particular, impact your board's strategy? Directors around the globe have offered their views on these questions.

In a reversal of norms given the volume of reports generated for directors' review, Diligent Institute and the Rock Center for Corporate Governance joined forces last year to solicit directors' insights for a report on these and other matters. The Diligent Institute focuses on providing publicly available research relating to board governance globally, and it does so in collaboration with academics as well as practitioners from both the private and public sectors. Stanford University's Rock Center for Corporate Governance is a joint initiative of the Stanford Graduate School of Business and Stanford Law School.

This research collaboration came in the form of a survey of almost 200 directors of public and private corporations. The survey was undertaken in order to better understand how companies balance stakeholder and shareholder needs.

Researchers concluded that, contrary to popular perception, companies do not place shareholders' needs significantly above those of their employees or society at large. The results are contained in the November 2019 report, 'Stakeholders Take Center Stage: Director Views on Priority and Society.'

It's worth noting that this research reflects insights from directors who are representative of multiple geographic regions and both publicly and privately held companies. Twenty-nine percent of the surveyed directors are responsible for privately held companies. Another 31% of those directors' companies are listed on a US exchange and the remainder are listed on non-US exchanges (32%) or on both US and non-US exchanges (7%).

Fifty-eight percent of the surveyed participants' companies are domiciled in North America, while the balance is domiciled in Australia, New Zealand, Africa, Europe, Asia Pacific, the Middle East, and South and Central America. The findings may dispel some preconceptions. The report concluded that corporate directors are not as shareholder centric as is generally believed.

Are Boards Shareholder Centric?

Boards spend significant time and energy focused on strategy, and this study examined how institutional shareholders impact board strategy. In developing strategies, boards must consider multiple issues. Those who participated in this research were asked to identify the single most important societal or environmental issue having the power to negatively impact their respective companies' long-term performance. Environmental issues topped the list, and were cited by 41% of the directors. Climate change, pollution, waste and recycling were the environmental concerns specifically acknowledged in identifying this top environmental and social governance (ESG) issue.

Social or political pressures leading to increased regulation or taxes (identified by 19% of the surveyed directors), broad economic factors (18%) and then workforce issues (14%) rounded out the top four single most important societal or environmental issues directors identified as having potential to negatively impact long-term company performance. In deliberating on such matters, directors will be aware of various stakeholders' perspectives on the range of issues.

Are Stakeholders Impacting Board Strategy?

Who are these stakeholders? Directors identified employees, local communities, local government, the public at large, trade unions, non-government organizations (NGOs), advocacy groups and 'other' as stakeholder groups. The study examined directors' insights on institutional shareholders in relation to these stakeholder groups, and boards' efforts to meet stakeholders' needs.

When asked whether they believe that their largest institutional shareholders really care about the interests of stakeholders, 60% replied affirmatively. Seventeen percent said they didn't know. Directors responded in a fairly consistent manner when asked if they believed that their largest institutional shareholders understand the jobs their companies do to meet the interests of these stakeholders. Fifty-six percent said yes, while almost half as many (27%) said no. Sixteen percent of directors said they didn't know.

Researchers asked directors whether their largest institutional shareholders believe that conflict exists between their interests and stakeholders' interests. In other words, do institutional shareholders believe that meeting stakeholders' needs is done at the expense of lower shareholder values? Fifty-two percent of directors said this was not the case. Another 28% didn't know, and just over one in five directors reported that their largest institutional shareholders do perceive that such a conflict exists.

Barely one in five directors said that their largest institutional shareholders believe there is such a conflict. Turning the lens in a different direction, this study took a look at whether directors incur pressure from their largest institutional shareholders to do more for stakeholders. Researchers found that the degree to which this is the case varied from US companies to non-US companies. Just over a quarter of directors of American companies, 27%, said they face pressure from their largest institutional investors to do more for stakeholders. For directors of non-US companies, though, that percentage almost doubled, to 51%.

Directors were asked how much pressure their respective companies receive from the largest of their institutional shareholders when it comes to meeting stakeholders' interests as their boards develop long-term strategies. Almost one in four (23%) reported no such pressure, while 36% reported low pressure. A third of the directors said they experienced moderate pressure from their largest institutional shareholders to meet stakeholders' interests, and a mere 8% reported facing high pressure.

How do directors feel about pressure from institutional shareholders? One reflected that such pressure is valid, and represents a big piece of ownership but that, '...while their perspective is important, they (institutional shareholders) shouldn't drive a decision that otherwise wouldn't be reached by management and the board.' Another director commented, 'The board is not under obligation to do what [shareholders] ask, but they are under obligation to listen, and they have the obligation to communicate. This is more of a two-way street than ever before.'

It may be that directors themselves place pressure on their boards to ensure that strategy is developed with stakeholder interests in mind. This research found that, overwhelmingly, corporate directors consider it important or very important that their companies consider stakeholder interests as they pursue business objectives.
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Shelagh Donnelly
Shelagh Donnelly writes about governance and the world of administration, and speaks internationally on both topics. She's been a direct report to C-level executives, including four CEOs, in the private and public sectors. Shelagh spent the last decade of her 21-year higher education career immersed in the world of governance. As the institution's governance point person, she elevated the directors' onboarding program, championed the introduction of portal software, and introduced efficiencies and practices that enhanced operations and ongoing board development. Responsible for effective operations of the institution's governance system and accountable to board Chairs and the institution's CEOs, Shelagh supported all five of the board's committees. She worked with four board chairs, more than a dozen committee chairs and multiple directors. Shelagh's professional affiliations have included the Institute of Corporate Directors (ICD) and the National Association of Presidential Assistants in Higher Education (NAPAHE). Through the Association of Governing Boards' (AGB's) Board Professionals Leadership Group, she served as a board professional mentor. She remains a member of Governance Professionals of Canada (GPC) and has served as Chair of the Board of Directors of CICan:GPOP (GPOP), a national professional association affiliated with Colleges and Institutes Canada (CICan). She is one of only two individuals to be recognised with the CICan:GPOP Award for Distinguished Service. Shelagh began publishing Exceptional EA, an online professional development resource for career assistants, in 2013. She continues to publish Exceptional EA and write for other publications, and is the author of the forthcoming book, The Resilient Assistant. Exceptional EA: ' Colleges and Institutes Canada (CICan):