Through their investment and subsequent stewardship activities (e.g., engagement and proxy voting), shareholders continue to focus on traditional as well as emerging sources of risk. Traditional risk elements include business strategy and its execution, competition, litigation, fraud, regulatory change and other risks specific to particular industries or business models. Emerging risks include intensifying focus on cybersecurity, technological change, environmental and corporate sustainability, and human capital management including gender diversity and pay equity.
This sharpened focus on a host of new issues is increasingly being articulated and implemented by the largest indexed investors, who collectively own—and vote—a growing percentage of the equity of corporate America. For example, in its January 2017 letter to directors of its portfolio companies, State Street Global Advisors’ CEO Ron O’Hanley discussed his company’s increasing focus on climate change risk:
“Since 2014, climate change has been a priority engagement issue for us because of its potential to impact long-term results. Last year we created a framework to help boards capture and evaluate different kinds of physical, regulatory and economic risks associated with climate change within specific sectors. We have provided detailed guidance as to how we assess a company’s evaluation of climate risk and its preparedness for addressing it. We have also sought to ensure that our voting record aligns with the priorities we have communicated to our portfolio companies.”
Companies increasingly seem to get the message. It is generally accepted that company management has the primary responsibility to manage risk, with the board having the responsibility to oversee management’s efforts. Unless investors have specific conversations with companies and their boards on this topic, the company’s proxy statement is investors’ primary source of information on board oversight of risk. Investor views on the degree to which risks to the company—and to the value of their investment—are being safeguarded will be significantly influenced by the quality and clarity of these disclosures.
Proxies typically discuss board oversight of risk in one of three fashions:
Over time, companies are shifting from approach 1 to 2, and now more than ever, 3.
For example, HCP, Inc., in its most recent (2017) proxy statement, used a combination of text and visual elements to explain their board risk oversight processes in such a way that the discussion is easily located, digested and understood. These more thoughtful and creative disclosures are more likely to generate confidence in their companies’ effective oversight of risk.
Due to space limitations in this article, we are sharing only the visual aspects of HCP Inc.’s disclosure. For a fuller view of their disclosure, please consult their proxy to see the greater context of these discussions.
Going forward, we anticipate that more governance-minded companies will continue to advance how they present their key messages, using visual elements as well as meaningful text explanations.
Ron Schneider is the Director of Corporate Governance Services for Donnelley Financial Solutions. He can be reached at firstname.lastname@example.org.