Director Dialogue: our engagement with FTSE 350 non-executive directors
Director Dialogue: our engagement with FTSE 350 non-executive directors
At Schroders we approach active ownership differently. We believe it is important to set clear expectations for companies around sustainable business practices. However, we also understand that there is no “one-size-fits-all” approach to many sustainability topics.
Discussion around the strategies that companies can put in place to manage environmental, social and governance risks is key to ensuring we are making progress and continuing to evolve and improve our understanding of these issues.
Why we invited NEDs to our HQ ahead of AGM season
In February this year we held our inaugural Director Dialogue event. We invited FTSE 350 non-executive directors, or NEDs, to come together with Schroders’ sustainability specialists and fund managers to discuss some of the most complex sustainability challenges.
As our chief executive Peter Harrison said in his introductory comments, we are acutely aware that a day doesn’t go past when businesses don’t receive another missive from government, from a fund manager, a non-governmental organisation or an action group saying “we expect you to do x or y”.
We don’t want to be another group just sending those out. These are complicated issues.
The idea of Director Dialogue was to deliberately choose topics which are “grey” areas. That is, where there is room for debate on a variety of different approaches companies may take to address these challenges.
We discussed how boards can and should be held to account on climate, how we can get the worker voice into the corporate boardroom and how ESG metrics can feed into executive remuneration.
We want to enable positive change. None of us want to stand in the way of progress. But on the other hand, we are aware that there are a lot of things that don’t have easy answers.
For example, on the topic of ESG being represented in executive pay, we need to ask the questions: “What does that actually mean in practice? What are the measures? How real are they and how measurable are they?”.
We believe it is important to work together with companies to help them adapt to these issues in the most effective way. This is an important part of the value we bring to our clients.
What we know from our dialogue with directors:
On climate change, it is clear that there are disagreements about who should be held to account and which benchmarks and metrics to use.
There are competing factors outside of the control of companies and some expressed frustrations over a perceived lack of understanding from policymakers over what is realistic.
Generally there is acceptance of the importance of transition, and companies are now facing the reality of implementation. However, directors do not yet feel fully equipped to deal with the challenge.
Many are seeking training and we expect board composition to be increasingly impacted by the need for climate change expertise.
ESG metrics in pay
There is broad support of the idea of executive compensation packages including non-financial criteria.
The question is where the bar is set. If it is too low, executives will leap over it.
However, so far there are few metrics that can be consistently monitored. More long-term data is needed and setting a standard to compare peers is challenging.
Some measures are less transparent than others and it is hard to get quantifiable data on “soft” issues.
It was argued that the fact that ESG criteria are included in pay in the first place signals their importance and helps facilitate dialogue with executives about their track record on sustainability issues.
There is an ongoing question of where the line is between ESG performance and “business as usual”, though.
Some NEDs at our event were surprised to see this topic on the agenda. Why would anyone push back on worker voice? However, opinion is often divided on how best to incorporate the views of employees in governance and decision-making.
The activity of diversity and inclusion groups seems to have improved board understanding of worker issues. The importance of in-person site visits by NEDs and surveys of employee sentiment also seem to be widely recognised.
However, there is still some debate over the appointment of employee directors – directors who provide a direct link between workers and boards.
Some NEDs are strongly of the view that companies aren’t yet ready to help people into these roles; an employee director, they argue, would need a huge amount of education.
Some questioned: how can one worker represent all workers given such diversified roles in an organisation?
>> Watch out for more Insights to come around environmental, social and governance "grey" areas
Feedback from this event was positive and we will look to hold more of these events in other regions.
We also published expectations in our Engagement Blueprint, which sets out our six core themes for active ownership: climate change; corporate governance; diversity and inclusion; human capital management; human rights; natural capital and biodiversity.
But the role of active owners does not end with setting expectations.
We believe working in collaboration with companies to help them meet these expectations is crucial to achieving better outcomes for our clients and society.
This is why we have set targets on engagement for equity and bond fund managers and analysts.
In the words of Peter Harrison, Schroders CEO: “We don’t think there are any easy answers, but we think the best answer is good discussion and debate.”
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