Governance Outlook

Building Long-Term Value: Insights from Leading Investors

By Marcel Bucsescu

12/11/2024

Shareholder Engagement

The year 2025 is anticipated to be one of the most volatile ever in US financial history, given the flammable mixture of deregulation, immigration curbs, tax cuts, and trade wars. But to see the big picture beyond a single year, US corporate boards—both public and private—should continue to build and maintain lines of communication with their shareholders. Conversations between NACD and representatives of four leading institutional investors revealed insights on what matters most to them for creating company value in the short and long term.

The November 5, 2024, election results were barely in when equity markets began to react. The S&P 500 jumped 2.5 percent, the Nasdaq shot up nearly 3 percent, Dow Jones Industrial Average flew to 3.6 percent, and the Russell 2000 ended plus 5.8 percent. Boosts in auto, cryptocurrency, and technology helped fuel this bull market encouraged by the prospect of dramatically reduced regulations and taxes for business. And the full year is likely to show positive stock market performance as well. According to Charles Schwab analysis of the six possible scenarios for the White House and Congress in the previous 23 presidential elections, markets do like some mixed scenarios involving a balance of powers, but a close second is a Republican sweep—the current outcome.

How can directors and investors work together to sustain positive results for the benefit of both companies and their shareholders? To gain further insight, NACD interviewed stewardship leaders from two public pension funds, a bank holding company, and an asset manager with combined assets under management of nearly $7 trillion. Quotes from interviewed investors are presented throughout this article in italics and without attribution.

Ten Takeaways

NACD’s conversations with equity market investors identified ten key takeaways that boards should consider to align governance practices with evolving investor priorities.

When assessing your investors, avoid active vs. passive labels. There has been a recent shift among some investment companies from proxy voting activism to a new kind of voting “passivity.” Institutions no longer feel a need to take a side during proxy votes as they once did. Some actively managed institutions may refrain from making any public statements and choose to simply vote with management. At the same time, when it comes to buy-sell decisions (the other side of the house), the idea of “passive” versus “active” investing has new shades of gray. Although indexed funds are considered “passive” because they simply buy and sell in imitation of an index, they can play a leadership role. As one investor noted, they are trying to “improve markets from the top down.”

Recognize that some investors favor long-term stability and vision over short-term gain. Directors may recognize that their investors are looking for return in excess of a benchmark (aka “alpha”), but one leading investor cautioned against focusing on this priority, stating that good governance requires the “protection of beta” as well. That is, board policies should minimize the volatility of the company’s stock price in comparison to others. This same investor noted that independent board leadership is critical to lowering beta during times of turmoil. “When everything’s going fine, nobody cares…about board independence…but in times of ‘choppy waters,’” investors want to know that the board has one or two people who will step up and “‘guide the ship’” as best as they can. When speaking with pension fund investors, they emphasized the importance of looking at the long term, as pension funds must “pay pensions over multiple periods,” while some boards do not look beyond the “next business cycle” or at best a three-year term for ratable vesting in a stock option plan.

Increase disclosure on how the board is approaching oversight of artificial intelligence (AI) and technology. One leading investor underlined the importance of AI, which is “here to stay” because it is interconnected with cybersecurity, geopolitical risk, and pay equity. The importance of all these topics is “magnified” by the existence of AI, which is “amplifying strategy.” Some investors are developing a policy on AI to be used when voting proxies. Another investor noted that although “directors aren’t getting any younger,” directors of all ages can stay current on AI and other trends in technology through continuing education.

Consider industry expertise and beware of overboarding. Who serves on a board matters as much as how they serve. Investors want to see board members who understand the companies they are serving. For some investors, the pendulum is swinging away from the intense focus on director independence that has dominated shareholder mindsets in recent decades, and back toward industry expertise. An investor warned against “tunnel vision” on independence. “You want a board with business experience, where directors know what the company does and can help strategically guide the company.” One of the investors interviewed—representing a public pension fund—gave the boards of the fund’s portfolio companies a high mark for regulatory oversight but expressed a concern about overboarding. This fund votes against directors who have too many board appointments (e.g., a director who serves on “multiple large company boards”). In addition, this investor would vote against a director who serves on multiple foundations, a mutual fund board, and a private equity board. Such a director is “very, very stretched.” The rule of thumb is that more than four boards raises a red flag. (For current investor policies on overboarding, see this recent article from Sidley Austin.)

Encourage board-shareholder dialogue: share, listen, and learn. One investor emphasized a current focus on face-to-face conversations with either the lead director or the chair of the governance committee. This investor was pleased to report that boards are accepting their requests to meet. An investor from a public pension fund shared a current goal of engaging with more audit committee chairs to discuss climate reporting, including methane gas emissions. Another pension fund investor emphasized the importance of face-to-face meetings, reporting a pattern of between 50 and 100 such meetings per year, in addition to the thousands of annual meetings that the fund team attends every spring. In-person explorations between investors and board leaders can replace the monologues seen in proxy resolutions, in which each side announces its position, but there is no exchange of views. But more than one of the shareholders interviewed cautioned directors against going into dialogue without an understanding of what matters most to the investors at hand. (See Know Your Owners below for more on this topic.) Finally, an investor from a publicly owned asset management firm said that their team values the participation of directors in meetings but also wants to hear the “nitty gritty” from the C-suite—for example, the head of human resources. Since managers can feel awed or stifled when directors are present, it may be beneficial having part of the meeting with managers alone—or to meet with them separately.

Focus on capital allocation and long-term value impact. A public pension fund representative, who leads the fund’s proxy voting, expressed a view on ideal capital allocation priorities: the top goal should be investing in the business first (including investment in climate resiliency and human capital) followed by dividends and repayment of debt then mergers and acquisitions. In their view, buybacks should be last in importance. This investor called the recent spate of buybacks a “disturbing trend,” and cited Boeing and Intel as examples of companies that in retrospect should have put capital investment first.

Check company disclosures on key financial and nonfinancial issues. Investors care about financial performance while also seeking precision and clarity on how companies address issues such as diversity and sustainability. As one investor noted, “The positive aspect from the anti-ESG movement is that it took the greenwashing out of asset stewardship.” Another investor looks closely at proxy disclosures on climate and gives negative votes if disclosure or oversight are weak. This investor, who is involved in a significant climate transition investing plan between now and the end of the decade, wants to see boards looking at both the risks and opportunities involved in climate.

Know your owners, and help them get to know you (no two investors are the same). These conversations provided a deeper understanding of how institutional investors decide how to vote their proxies and to buy and sell stock. As one pension fund representative noted, both the proxy voting teams and the investment teams are making decisions for the long-term returns of beneficiaries but there can be a disconnect. An investor observed, “From the fiduciary perspective, it's not really a separate issue, but organizationally it often is.” Another investor highlighted an important distinction between the types of dialogue that might occur between management and a buy-side analyst tracking 40 or so companies versus the very different nature of the dialogue between the board and the investment stewardship team of a pension fund that holds stocks in thousands of companies. “We don’t expect every company to be an NVIDIA,” this investor explained. “If you are a ‘Steady Eddie’—a serial compounder with a nice dividend yield—that is music to our ears.

Be mindful of proxy advisors without marching to their drum. Sometimes, the leading proxy advisors can be on the “wrong side of the issues” when they make voting recommendations, asserted one investor. That is, institutions do not always agree and follow along with Institutional Shareholder Services (ISS) and Glass Lewis. Another investor called the outsourcing of voting to a proxy advisor “unfortunate.” But that same investor did not support heavier regulation of proxy advisors. A pension fund investor expressed opposition to the Trump-era rule requiring greater transparency of proxy advisors. The rule, which was rescinded under Gary Gensler’s SEC, is likely to be restored under his replacement in the new Trump administration.

Consider the impact and value of antitakeover mechanisms. Mechanisms such as poison pills and dual-class stock have always been unpopular with noncontrolling shareholders—of both public and private companies—and these conversations suggested that this sentiment is not changing. One investor, representing a major pension fund, characterized the rush to institute poison pills five years ago during the bear markets of the pandemic as mere “short-termism” that proved unwise when the markets rebounded. This investor also warned against the more recent trend of “stealth dual-class stock,” described as “misalignment under the radar” in a recent article by the Council of Institutional Investors.

Continued Commitment, New Horizons

The investors interviewed by NACD seemed generally pleased with the effectiveness of boards in overseeing public company performance. While our conversations revealed some areas for improvement, such as climate disclosure and board composition, there was the strong sense that they are more than willing to continue making major and sustained investments in the equities of US public companies, including the “Steady Eddies” that deliver modest but predictable returns.

Of course, not all institutional investors are focused on publicly traded stocks. A preelection survey by Schroders found that North American institutional investors see post-election market behavior as merely “short-term noise.” The same survey also found a new trend toward private equity investments, which are less likely to be affected by any regulation (or deregulation) that may come with respect to public companies. That opens an entirely new field for investor dialogue—to be continued.

Questions Directors Can Ask

  • How well do we know our shareholder base, and how closely are we aligned to their goals? In a choice between high annual returns and high volatility versus modest returns with predictability, what do they prefer, and can we deliver it? If there is a mismatch, what are our prospects of finding new investors?
  • How closely do the credentials of our directors align with the demands and issues of our industry? Do our proxy statement disclosures capture the value of each board member?
  • How often do we meet with our key investors, and why? How do we calibrate frequency and prioritize engagements? (Not every investor needs to meet with key management or the board every year.) When we meet, do we know in advance the questions that may come up, and consider inviting key managers to join for part of the meeting?
  • How do the capital allocation decisions of management align with the company’s approved strategy? What are our investment priorities, and how are these priorities communicated to our investors?
  • As we approach the 2025 proxy season, what director nominations will come before our shareholders, and what issues, if any, might they raise? How can we increase the chances of strong support for our nominees? Do we face any shareholder resolutions, and if so, how should our company respond to them?

Marcel Bucsescu is the vice president of strategic engagement for NACD, leading NACD's external engagement and NACD's Fortune 500 Advisory Councils. Previously, he led the NACD Directorship Certification® program. Before joining NACD, Bucsescu served as executive director of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School and also served as co-program director of The Conference Board's Chief Legal Officers Council.


This article is part of the 2025 Governance Outlook report that provides governance insights for the year ahead.

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