IN-DEPTH: What drives opposition toward directors?
Investor voting rationales provide valuable insight into how shareholders evaluate proposals subject to a vote at annual meetings using them as tools to signal the changes they want to see from company boards.
Diligent Market Intelligence (DMI) has imported over 2.3 million voting rationales on the platform in the two-year period since 2022, providing extensive insight into global investor voting trends.
In 2023, director re/election proposals secured 95.9% average support globally, compared to 96.1% a year prior. When evaluating support levels in the U.S., Europe and Asia, the U.S. faced the lowest average director support, with proposals averaging 95.9% backing, down from 96.4% and 96.1% in 2021 and 2022, respectively.
Directors at Asia-based companies received the highest average support in 2023, at 97.1%, compared to 97.4% in both 2021 and 2022. For the third consecutive year, support for directors at European companies held steady at 96.7% on average.
Below, DMI takes a closer look at investor rationales pertaining to director re/elections and the principal areas that drove opposition.
US
In the 2023 proxy season, investor voting rationales often pointed towards compensation concerns, when it came to votes against directors at U.S.-based companies.
BlackRock voted against four directors at a California based media company’s annual meeting, along with its “say on pay” proposal, due to a lack of disclosure surrounding an “outsized” award for its CEO.
Similarly, the annual meeting of a U.S. construction company saw UBS Asset Management oppose six directors, citing a “lack of responsiveness to remuneration concerns.”
“Year-over-year, our reasons for not supporting director elections – and management proposals generally – are consistently governance-related: board composition and effectiveness, including executive compensation,” BlackRock’s 2023 voting spotlight report reads.
Board racial/ethnic diversity was also a recurring theme among dissenting voters. At a leisure company’s annual meeting, Legal & General Investment Management (LGIM) opposed a director “because of a lack of progress on ethnic diversity on the board.”
“LGIM expects the boards of the largest U.S. companies to include a minimum of one ethnically diverse director. Board diversity is an engagement and voting issue, as we believe cognitive diversity in business – the bringing together of people of different ages, experiences, gender, ethnicity, sexual orientation and social and economic background – is a crucial step towards building a better economy and society,” the investor’s rationale reads.
UK and Europe
Rationales behind investor opposition toward directors varied slightly between the U.K. and Europe, in part owing to nuances in corporate governance regulations. In Europe, many investors encouraged increased independence in cases where companies lacked a majority independent board or committee.
Desjardin Investments opposed the election of five directors at a German apparel company’s 2023 annual meeting, citing in its voting rationale that it expects boards to be two-thirds independent, while board committees should consist of independent directors only.
In its 2023 regional report, Vanguard noted that U.K. companies specifically “have high levels of board independence, with the only debate in this area centred on tenure of board chairs.”
Opposition toward U.K. board chairs in part stems from some companies extending chair tenure beyond the U.K. Corporate Governance Code’s recommended nine years during the COVID-19 pandemic, a concession which Vanguard noted some companies have yet to withdraw.
Board diversity was also a focal point of director opposition in 2023.
U.K. boards were held to account on ethnic diversity, following a 2022 update to the U.K. Listing Rules, specifying that boards feature at least one ethnically diverse director on a “comply or explain” basis. European directors were opposed where they failed to show evidence of working toward EU gender diversity regulations, which will require 33% representation of the underrepresented sex on boards by 2026.
BMO Global Asset Management voted against the election of one director at a Swiss biotech’s company’s 2023 annual meeting, citing in its rationale that “in developed markets, our minimum expectation is that women should comprise at least 27% of the board.”
Asia
While directors at Asia-based companies boasted higher average support than their Europe- and U.S.-based counterparts, investor voting rationales revealed several recurring themes that drove director opposition, namely a lack of board independence and ESG oversight.
“Director independence continued to be a significant driver of votes to signal concerns [in Asia], relative to other regions,” BlackRock’s 2023 voting spotlight report reads. “While companies gradually continue to increase independence at the board level, a significant number of boards have yet to achieve a level of independence that we consider consistent with protecting minority shareholder interests.”
At the 2023 annual meeting of a Chinese software company, Neuberger Berman opposed two directors, specifying that “an independent chair is better able to oversee management and set an agenda aligned with shareholder interests without the conflicts of interest that an executive or insider director might encounter.”
Another example saw T. Rowe Price Associates oppose a director at the board of a Japanese engineering company where the fund manager cited “the weakness of directors in holding [the] chairman to account.”
ESG is also gradually forming part of more investor voting rationales. At the 2023 meeting of a Japanese energy company, LGIM opposed a director on the grounds that the board was not meeting “minimum expectations” regarding its net-zero journey, including “having a target in place to reduce material Scope 3 emissions [and] for phasing out unabated coal.”
