Better boardrooms: does shareholder action improve returns?
Drawing on six years of Schroders’ voting and engagement data – in which we cast almost 6,000 votes in relation to nearly 2,000 company boards – analysis shows a clear link between challenges to board composition and better returns.
Autheurs
Boards make the most important decisions at a company, including appointing CEOs, approving business strategy, and taking accountability of business risks at the most senior level. What makes a good board is a complex question, but diversity of thought is certainly one element of it. Well-functioning boards need a variety of perspectives to holistically assess risks and opportunities, navigate challenges requiring nuance and expertise, and avoid groupthink.
Investors can only take an ‘outside-in’ perspective because they don’t attend board meetings themselves. Meanwhile, information on board quality and diversity of thought is often incomplete. Often, investors rely on third-party recommendations and regulatory guidance for understanding how boards should be shaped, and vote against the election or re-election of directors where board composition falls short of industry norms.
Even when a board looks good on paper, it may not function well in practice. Investors who actively engage companies can better understand the level of healthy debate and interpersonal dynamics amongst senior leaders and board members. Active investors consider the socio-economic context and are able to encourage changes in board composition with more business relevance.
Corporate engagement is what can set investors apart in seeking excess returns through improvements in board quality and business decision making. This is a clear trend we can gauge from our latest research assessing the financial and board composition outcomes from over 6,000 Schroders votes against directors on board composition grounds at nearly 2,000 companies between 2018 and 2024.
Where we vote and engage, companies see cumulative excess returns of 9% over five years on average. These companies experience considerable improvements in board composition metrics, like refreshment, independence, and women on the board.
Not all companies are the same. In some cases, they are highly responsive. In other cases, they may not be making progress at pace with investor expectations resulting in our voting against directors for several years. These companies may need more time to enact changes in the boardroom, particularly when there is a limited pipeline of external talent. Based on this research, promotion of internal talent can be a credible approach to board refreshment and is also associated with excess returns.
Figure 1. Peer-relative shareholder returns from the first vote against management recommendations on board composition grounds, indexed to 1,000
Engagement clearly enhances an investor’s ability to influence the boardroom. By contrast where we only vote without engagement, the results are more mixed. In taking a thoughtful approach to assessing board quality and advocating for change only when it is material to the business, investors can help shape better boardrooms and achieve outperformance.
Subscribe to our Insights
Visit our preference center, where you can choose which Schroders Insights you would like to receive.
Autheurs
Topics