Amy Wilson, Head of Stewardship Strategies at Norges Bank Investment Management, outlines the sovereign wealth fund’s approach to voting and explains why consistency offers clarity.
ESG-related shareholder resolutions experienced mixed levels of support in the 2023 proxy season, but the boards of investee firms did not have things all their own way.
The world’s largest sovereign wealth fund (SWF), Norges Bank Investment Management (NBIM), voted against the board recommendation on 5% of shareholder proposals and voted against at least one at a third of company AGMs, according to the fund’s ‘Our Voting First Half 2023‘ report.
Executive pay and board composition were among the points of dispute, with the latter considered a fundamental topic for the SWF, in part due to its relatively small ownership percentage in the companies within its portfolio.
Small stakes demand large amounts of trust, but assessing board quality is challenging when a fund lacks direct involvement in board meetings or has limited familiarity with the individuals involved, says Amy Wilson, Head of Stewardship Strategies at NBIM.
“To gauge the quality of a board, we rely on various indicators that provide us with confidence,” she says, adding that one of the fund’s primary criteria is the presence of sufficient independence within the board.
“We emphasise the necessity for board members to possess appropriate skills, competences, and a diversity of perspectives. In this context, we view having sufficient representation of each gender as an important indicator of board quality and decision-making,” says Wilson, noting that the NBIM considers multiple dimensions of diversity, with gender a key focus due to its global applicability.
“It’s clear that the diversity of perspectives contributes to better decision-making processes,” says Wilson, who also underlines the need for investors to use various lenses “to gauge the overall quality and effectiveness of a company’s governance structure”.
Separation of powers
A related focus area for NBIM, which manages assets worth around US$1.3 trillion, pertains to the separation of the roles of CEO and Chair.
While this consideration’s relevance varies across markets, explains Wilson, it remains prevalent in some, such as the US and South Korea.
Last year, a report by the Financial Times noted that only 2% of UK listed firms combine the roles, contrasted starkly by the US where around 43% of S&P 500 companies do.
“Our stance, as articulated in a past position paper, is that the roles of Chair and CEO should not be held by the same person,” says Wilson, adding that this segregation ensures a “proper equilibrium” between the CEO’s role in leading the company and the Chair’s responsibility in overseeing board meetings and governance processes.
“The separation of these roles is therefore an important concern for us.”
Regarding board composition more broadly, NBIM has witnessed some noticeable improvements, particularly in terms of board independence in developed markets. Additionally, progress is being made in terms of gender diversity.
“The proportion of companies within our portfolio that do not meet our minimum voting policy – requiring a minimum of two representatives from each gender on the board – is decreasing, which is an encouraging trend,” explains Wilson.
However, despite progress, there is still a gap to close for many companies globally to align with NBIM’s diversity expectations, she adds.
NBIM’s global voting guidelines establish a baseline that the fund seeks to enhance gradually, aiming to bridge the gap between the absolute minimum it considers acceptable and the level it ideally wants companies to achieve according to its expectations.
“In terms of gender diversity, our expectation is to have at least 30% representation of each gender on company boards,” says Wilson. While this objective is still a “work in progress” globally speaking, there is a positive trend of narrowing the disparity.
Wilson stresses the importance of engagement and opening dialogue with investee firms in driving outcomes in line with NBIM’s voting guidelines.
“In company dialogues, we are able to get into more detail. For example, when discussing diversity, we can discuss the challenges companies may face, such as building mixed gender talent pipelines in sectors that have traditionally been male-dominated, as well as evaluate progress against stated targets.” says Wilson, noting that these engagement dialogues also provide the fund with the opportunity to explore diversity from a broader perspective beyond just gender representation on the board.
“We aim to assess diversity across various dimensions throughout the workforce to ensure that companies are actively cultivating effective and inclusive talent pools within their organisations, in the context of effective management of human capital.”
In the first half of 2023, NBIM voted against CEO pay packages at more than one in 10 companies, a higher rate than in recent years. This was driven by concerns about pay in the US and a tightening of the fund’s voting framework with the intention of identifying the renumeration structures that it viewed as particularly problematic and misaligned with long-term value.
“Our position on executive pay is quite established, and we actively advocate for a shift away from the prevailing market standard structures in favour of a simpler and more transparent model centred around long-term share ownership for CEOs,” says Wilson.
The fund has articulated this viewpoint in various papers, outlining the rationale behind its stance, which, put simply, argues that CEO pay should be value-creating for the company, with a substantial total of annual remuneration provided as shares that are locked in for at least five (and preferably 10 years), regardless of resignation or retirement.
“We firmly believe that there are compelling reasons to transition to these alternative models,” says Wilson, noting that a significant number of companies globally have yet to embrace these simplified compensation frameworks.
Many still adhere to the conventional market-based approach, she explains, which typically involves a combination of salary, bonuses, and stock options or other incentives, varying depending on the country.
Given this situation, NBIM’s approach in its voting guidelines is designed to be constructive rather than punitive.
“We don’t think it would be constructive for us to vote against every company that hasn’t aligned with our desired compensation structure,” she says.
Instead, the fund has established specific thresholds that help it identify companies that exhibit substantial misalignment with it preferred preferences.
“Our focus generally centres on instances where there is a clear disparity between executive pay and the creation of long-term shareholder value,” she says, explaining that the fund expresses concerns about compensation structures that encourage short-term thinking.
NBIM also scrutinises cases involving sizable one-time awards that it believes lack “sufficient justification”, as well as practices like providing a ‘golden hello’ to incoming CEOs. In addition, the fund’s evaluation extends to the effectiveness of boards in overseeing these matters, considering how well they respond to shareholder feedback, especially if there has been notable dissent on compensation in prior years.
This approach forms the foundation of the fund’s compensation assessment, which is applied to companies across the globe.
In the US, the fund introduced an enhanced evaluation for the most substantial compensation packages. Currently, this threshold stands at US$20 million, says Wilson, adding that this figure might change in the future.
“For packages exceeding this limit, which we consider to highly-costly for shareholders, we assess them against an enhanced framework,” she says. While the fund doesn’t base its vote solely on compensation size, it closely examines whether the amount is justified in the context of the company’s strategy and performance, and whether it has concerns about compensation structure.
“We address concerns about the structure of the package, particularly if there is an overreliance on share options or other short-term vesting awards,” she says, adding that the fund’s evaluation encompasses factors such as dilution levels and comparisons with peers.
“In essence, our approach remains consistent, but we intensify the scrutiny for the largest compensation packages, on the basis that, the higher the cost, the more important that the incentives are right.”
Value of human capital
NBIM’s investee firms this year saw a notable increase in the number of shareholder proposals relating to human rights and human capital management, with 81 proposals in the first half of 2023 compared to 51 in 2022 and 9 in 2021.
Wilson says this trend highlights that human rights and workforce-related issues hold “immense significance” when considering long-term value; representing substantial risks and, equally, considerable opportunities.
Recent global events have underscored the crucial nature of certain topics, particularly that of human capital, notes Wilson, with the pandemic highlighting the importance of firms adeptly companies managing their human resources during the crisis.
Human rights risks, on the other hand, should not be considered new to the realm of significance, she says, although there has been a gradual increase in focus on them over several years, due to several notable events, including the war in Ukraine and other conflict zones, as well as a growing awareness of human rights abuses within company supply chains, particularly within the mining sector.
This week, the International Sustainability Standards Board (ISSB) was called upon to prioritise researching human capital and human rights disclosure standards in its upcoming two-year work plan, citing “all-time high” demand from investors for more and better workforce data. The call to action was coordinated by responsible investment NGO ShareAction and signed by more than 20 asset owners and managers, including pension fund Scottish Widows and Impax Asset Management.
This growing emphasis might indicate a tipping point in investor engagement with these topics, possibly leading to more coordinated efforts in addressing them, says Wilson, adding that the complexity of these matters might necessitate a prolonged period for achieving coordination.
Nonetheless, numerous investors would concur that these issues hold material importance for long-term value creation, she adds.
Spectrum of stewardship
In the first half of the year, NBIM voted at 8,522 shareholder meetings and on a total of 94,731 proposals. When asked about the perceived effectiveness of shareholder proposals in holding investee firms to account on environmental and social issues, Wilson acknowledges that they serve as a valuable tool, while accepting that their effectiveness depends on the specifics of each case.
“We regard shareholder proposals as a beneficial instrument, particularly when considered within the broader context of continuous engagement with the company,” she says, noting that they tend to yield the best results when highly tailored to the unique circumstances of the company in question.
“For instance, if we have been engaging with companies regarding topics such as climate change or significant social issues and find their progress lacking, we may consider a shareholder proposal,” she says, noting that this proxy season saw NBIM employ this approach in several instances concerning climate-related matters.
Additionally, the process of considering a shareholder proposal can facilitate productive engagement dialogues with companies, potentially leading to constructive outcomes, she says.
“Our perspective is that shareholder proposals are valuable tools to be applied selectively and carefully, always taking into account the ongoing engagement with the company.”
In a broader market context, when other entities propose shareholder resolutions, the fund assesses each of them individually, exercising thoughtful consideration in its decisions.
“Such proposals can be instrumental in elevating certain topics onto the agenda and focusing attention where it is required,” she says.
“Considering the diverse investor landscape, where some lack the resources for continuous engagement, shareholder proposals become even more useful.
“Retail investors, for instance, who may not be engaged with companies year-round, may gain valuable insights from these proposals and the discussion around them. However, it’s essential that these proposals are well-crafted and precisely targeted; otherwise, they might fail to achieve their intended impact.”
NBIM aims to be “consistent and predictable” in its vote decisions, such that they can be anticipated by investee companies and explained by its voting guidelines and other documentation. To support this, since 2021, the fund has published its voting intentions five days before each meeting, with a brief rationale referring to the relevant part of its voting guidelines, whenever it opts to vote against the board’s recommendations.
Transparency is a “fundamental principle” that guides our activities across the fund, says Wilson, confirming that this commitment to transparency extends to its voting practices.
“The act of disclosing our vote decisions ahead of the AGMs represents another stride towards maximising transparency for the companies we invest in,” she says.
“Given the substantial number of companies we are invested in, it is not feasible to individually communicate with each company to explain our vote choices,” she says.
“Our approach serves as a means to offer companies a clear understanding of the reasons behind our voting positions.”
Beyond benefiting the companies, NBIM engages with, this transparency principle has broader advantages, explains Wilson.
“It offers insights to other market participants who might find value in understanding how we voted on various matters,” she says, adding that the fund recognises the importance of being transparent to its stakeholders, including the Norwegian public and other interested parties.
“This commitment underscores our dedication to providing a clear view of the decisions we have arrived at through our voting process.”