August 16, 2018

IPO Governance Trends: Not “Shareholder Friendly”

Lots of interesting stuff in this Davis Polk survey of IPO governance trends among the Top 50 companies by deal size. There hasn’t been much change in the prevalence of defensive measures:

– 90% of companies adopted a classified board
– 94% of companies adopted a plurality vote standard for uncontested director elections
– 84% of companies effectively prohibited shareholder action by written consent
– 84% of companies had provisions prohibiting shareholders from calling a special meeting
– 78% of companies required a supermajority shareholder vote for amending the bylaws
– 90% of companies adopted exclusive forum provisions (up from only 14% in 2011)

When it comes to governance topics that aren’t necessarily enshrined in the articles & bylaws (and, interestingly, that many people agree shouldn’t receive “one-size-fits-all” treatment), more companies have been adopting “shareholder-friendly” practices:

– Average level of director independence was 73% of the board
– Over 80% of companies had fully independent audit, compensation & governance committees
– 52% of companies separated the role of chair & CEO (up from 34% in 2011)
– 38% of companies had an independent chair, and 33% of the remainder had a lead director

Of the 50 companies, 19 listed on the NYSE and 31 listed on Nasdaq. The survey also takes a separate look at practices among the Top 50 controlled companies.

Responsible Investing: Institutional Investor Trends

Recently, Aon surveyed 223 institutional shareholders about their “responsible investing” initiatives (also see this Morgan Stanley survey). There’s been a dramatic upsurge of interest in this area – more than a quarter of the world’s professionally-managed assets now have a responsible investing mandate – and the 28-page report cites to a number of large studies that show a link between high ESG rankings & performance. Here’s some takeaways:

– Overwhelmingly, the most common type of responsible investing is incorporating ESG factors into investment decisions – as opposed to applying values-based screens to exclude or include investments (but note that when it comes to active investors, this Clermont Partners survey says that 47% apply a screen – and we’ve blogged about State Street and BlackRock initiatives).

– EU & UK investors are much more likely to have responsible investment policies in place, compared to US investors.

– Only about 35% of respondents (15% of US respondents) said that they use shareholder engagement/activism & proxy voting to express their responsible investment initiatives.

– Climate change is the top concern, followed by other environmental issues, bribery & corruption, weapons manufacturing and human rights.

– Lack of consensus on ESG factors, returns, materiality and definitions hinders progress.

The report also touches on retail investing – ESG assets have more than doubled since 2014. Strangely, this survey found that wealth advisors currently believe there’s low demand for “socially responsible investing” – but they expect growth over the next five years…

Impact Investing: Continued Growth

In this “Annual Impact Investing Survey,” the Global Impacting Investing Network looked at 229 “impact investors” – including fund managers, foundations, banks, family offices, and pension funds. Here’s a few interesting findings:

– 84% of respondents that make both impact and conventional investments noted that their organizations are making more impact investments and are demonstrating greater commitment to measuring and managing their impact. Just 6% of respondents indicated greater reluctance to making impact investments at their organizations.

– Over half of respondents target both social & environmental objectives. An additional 40% primarily target social objectives, and 6% primarily target environmental objectives.

– Most respondents reported using a mix of tools or systems to measure their social & environmental performance. Most commonly, respondents use proprietary metrics and/or frameworks that are not aligned to external methodologies (69%), qualitative information (66%), or metrics aligned with IRIS (59%). Further, two years after the ratification of the Sustainable Development Goals (SDGs) by the UN, three out of four investors report tracking their investment performance to the SDGs or plan to do so in the future.

Liz Dunshee