As Markets Fall, Governance Rises in Importance | Morningstar

“Only when the tide goes out do you discover who’s been swimming naked.” Warren Buffett’s famous analogy highlights how a downturn in the strength of the markets or the economy, reveals previously-hidden risks and weaknesses for companies and investors. Although many investors have recently given most of their attention to the “E” and “S” parts of environmental, social and governance (ESG) world, we’re again seeing a renewed focus on the “G” by cautious investors as Buffett’s tide recedes.

Energy price spikes, rising interest rates, and falling equity and bond prices are making it harder for structurally-vulnerable businesses to just finance their way out of trouble.

Additionally, scandals in less-regulated markets such as crypto, alongside ongoing governance quarrels at Tesla, seem to capture the zeitgeist.

All this has prompted fresh scrutiny from investors on governance and oversight issues, which is feeding into asset managers’ and asset owners’ stewardship priorities.

Increasingly, shareholders want to ensure the right people are leading the businesses they invest in, and that they can be held to account for their performance and oversight of the company.One particular area of focus for asset managers and owners is management entrenchment. This refers to mechanisms some companies use to limit shareholders’ ability to demand changes in leadership.US companies are getting pushback on these issues from shareholders.

Over the last three proxy voting years, there were 88 shareholder proposals at US companies requesting changes to company bylaws to permit simple majority voting on director elections and other corporate governance matters, replacing the much higher “supermajority” votes some companies demand. These proposals received an average 61% support from shareholders with 22 receiving above 90% support, according to Morningstar data.

Over the same period, a further 19 shareholder resolutions requested that a company’s board be declassified – that is, to submit all director elections to a shareholder vote at the same time rather than in separate classes staggered over several years (which prevents shareholders from rotating board members if they see fit). These proposals gained an average 76% support from shareholders.

As Markets Fall, Governance Rises in Importance | Morningstar

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