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Institutional investors looking more closely into companies, boards – Morrow Sodali

Asset owners and managers continue to "dig deeper" into how their portfolio companies are dealing with issues such as ESG, executive pay and activism, and away from compliance checklists, according to Morrow Sodali's Institutional Investor Survey released Monday.

"Shareholders are increasingly interested in looking at companies on the merits rather than just doing a compliance exercise," said John Wilcox, chairman of Morrow Sodali, a global corporate governance firm, in an interview.

The fourth annual survey asked investors with a collective $33 trillion in assets which issues matter most about the companies they hold. The 46 respondents represent senior governance specialists in their organizations, with $19.5 trillion in active investments and $13.5 trillion in passive ones. The survey was a combination of an online survey and one-on-one meetings.

Asked to rank the factors that influence their voting decisions, 93% selected governance policies and practices, followed by long-term business strategy and effective communications. On environmental, social and governance factors, the survey found it is "increasingly being blended into the discussion about what companies are supposed to be doing and how they are judged," Mr. Wilcox said.

On board engagement, 87% of respondents indicated that "proactive and regular engagement" with the board of directors helps them evaluate a company's culture, purpose and reputational risk. That can be good news for the companies because "some investors are willing to give companies greater flexibility to explain policies in terms of their specific business conditions and strategic goals," Morrow Sodali found, even though a deeper dive into companies' strategic decisions increases demands on directors' time and requires greater transparency.

In 2019, the investors said they will increase their focus on board composition and accountability, and press for more disclosure and dialogue around a company's climate-change strategy.

Executive pay also will shift from an investor-specific activity and instead come up more through collective engagement efforts in 2019, the survey found, with 67% of investors ranking compensation as the most important issue in their engagement with other investors.

Asked about activist campaigns, the institutional investors said they are most likely to support one when there is a focus on long-term strategy.

Given the current U.S. political climate toward deregulation, "people are looking to companies now to fill in the gap," Mr. Wilcox said.