Equilar Institute

The Investor Take: What’s to Come in the 2020s

An interview with Amy Borrus, Deputy Director of the Council of Institutional Investors

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Amy Borrus is Deputy Director of the Council of Institutional Investors (CII), a nonprofit, nonpartisan U.S. association of employee benefit funds, state and local entities charged with investing public assets, foundations and endowments, with combined assets in excess of $4 trillion. CII’s associate members include non-U.S. asset owners with more than $4 trillion in assets and a range of asset managers with more than $35 trillion in assets under management. CII promotes good corporate governance, strong shareholder rights and sensible regulation that fosters fair and vibrant capital markets.

Ms. Borrus plays a lead role in developing CII strategy, policies on corporate governance and other issues, and outreach to stakeholders and policymakers. She manages CII communications and speaks frequently on behalf of CII. Ms. Borrus has key responsibilities for the content of two conferences annually that draw 450+ attendees. She organizes CII’s forum for governance professionals, its platform for dialogue between investors and companies, and programs for pension fund trustees. She also supports CII’s board of directors on strategy and audit matters.

Ms. Borrus serves on the FTSE Russell Policy Advisory Board and the Independent Steering Committee of Broadridge. She also serves on the boards of the CII Research and Education Fund and the Sinai Assisted Housing Foundation.

Before joining CII in 2006, she was a correspondent for Businessweek magazine for more than two decades, including assignments in London, Tokyo and Washington, D.C. She earned an MSc. in International Relations from the London School of Economics and a B.A. from the University of Pennsylvania.

The 2020s are off to a quick start, and companies are preparing for a whirlwind next couple of years. Already, several stories have captured the headlines, including the coronavirus and an announcement from the Business Roundtable on a new “Stakeholder Model,” which may have a direct impact on corporate America. Consequently, companies must adequately engage with their investors to ensure they stay ahead of these trends.

C-Suite sat down with Amy Borrus, Deputy Director of the Council of Institutional Investors (CII), to discuss the most pressing issues that companies will face in 2020 and beyond. Ms. Borrus shared an investor perspective on the most critical topics, including environmental, social and governance (ESG) issues and human capital management (HCM), and how companies can ensure sound governance practices in the new decade.

C-Suite: The Business Roundtable recently made an announcement encouraging companies to embrace the “Stakeholder Model” as opposed to one that is more shareholder-centric. What do you think will be the impact of this announcement? How can companies get ahead of this development?

Amy Borrus: While supporters of a “stakeholder primacy” approach to corporate governance cheered the Business Roundtable’s (BRT) August 19 statement, I do not think that was actually what the BRT was embracing.

First, the BRT statement outlined the importance of considering the interests of various stakeholders, but it did not suggest any account- ability mechanism to back that up. In my view, it was more of a CEO-knows-best model. Second, six days later, the BRT issued a lengthy clarification on Medium.com in which it explicitly denied that BRT CEO signatories were trying to move toward stakeholder governance. Third, BRT members told CII staff that the intent of the statement was not to change anything, but simply a public relations effort to state more clearly that in doing their jobs, CEOs do think about employees—including fair treatment, morale and company culture—as well as obligations to communities, customers and suppliers. I have no doubt that good CEOs consider the views and interests of key stakeholders—they cannot create sustainable value without doing so. Summing up, I think there may be less difference between the BRT stance and CII’s view that creation of long-term shareholder value requires considering the interests and expectations of a broad range of stakeholders.

Regardless, the BRT statement has turned up the heat on a global discussion between investors, executives, directors and academics about how much weight companies should accord various stakeholders. And I think the discussion will continue.

What impact might that have? I think companies will be talking about their stakeholders more. Prudential Financial jumped in early, with a December statement of purpose that detailed its commitments to shareholders, employees, customers and society. It is worth noting that Prudential put shareholders first and stated that “Sustain- able long-term shareholder value creation is the mark of our success.” That seems very much in sync with CII’s view.

The BRT statement raised expectations for CEOs who signed it. Some may take heat for actions that appear to contradict their commitments to key stakeholders. Jeff Bezos, for example, was lambasted in the media for cutting benefits to part-time workers at Whole Foods just weeks after signing the BRT statement.

I see limited headway in the United States for companies to put other stakeholders’ interests ahead of delivering long-term shareholder value. In speaking to executives and directors about the BRT statement, I have sensed a fair amount of skepticism that the commitment was more than rhetoric.

More importantly, putting other stakeholders’ concerns ahead of shareholders’ concerns conflicts with fiduciary obligations of boards to shareholders and fiduciary obligations of many institutional investors to their beneficiaries. Delaware law’s business judgment rule gives great discretion to boards in deciding what will serve to drive long-term value. But boards’ actions must connect at some point with creation of shareholder value.

Pension funds have a fiduciary duty to seek returns to pay retirement benefits for decades to come, in a tough environment where funding is constricted. Fund trustees take this responsibility seriously. Mainstream asset managers, to whom pension funds entrust their assets, have a fiduciary duty to invest in the interest of earning returns for their clients. What our investor members tell me privately is, “CII has it about right.” Stakeholder interests matter, no question. But at the end of the day, the North Star for public companies is driving sustainable, long-term shareholder value.

As the theme of this issue of C-Suite focuses on outlook 2020, what would you say will be the top priorities for boards and executives in the new decade ahead?

Borrus: I’d like to suggest a handful of topics to consider. In alphabetical order:

Americans across the political spectrum are wary of the enormous clout of a handful of tech companies and growing consolidation in other industries, especially financial services. U.S. anti-trust enforcement, virtually supine for the last 40 years, may reawaken and shift the business landscape.

Artificial intelligence (AI) is beginning to transform one industry after another. Digital assistants, facial recognition and driverless cars and planes are just a few innovations AI makes possible. Boards will need to under- stand how AI fits into corporate strategy and whether the company has the digital skills and computing power to use it to innovate. But AI also raises data privacy and cybersecurity concerns that boards will need to understand, too. With few legal checks and balances against privacy infringement and the risk that collection and use of behavioral data can have harmful applications, AI is a technological Wild West.

The spreading coronavirus probably has some boards adding “pandemic risk” to their oversight to-do lists. But more broadly, the deadly virus underscores China’s critical role in the global economic system—and the ways events in China can disrupt supply chains, stores and other business for multinational companies in an array of industries. As the New York Times noted recently, when the SARS virus emerged in China in 2002, the country was turning out mostly low-cost consumer goods.

Today, China is a dominant producer of advanced products and a huge manufacturing workshop for parts needed by factories from Australia to the Americas. It is also a much bigger force in global trade and a major market for U.S. companies.

General Motors sells more cars in China than in the United States, Qualcomm looks to China for nearly half its revenue and Apple assembles most of its products in China. What happens in China will reverberate widely.

Climate change risk is not new, but awareness of it is accelerating and it is likely to be a “hot” issue (pardon the pun) throughout the next decade. I think boards are just beginning to grapple with the implications of climate change on capital allocation, supply-chain management, and development of products and services. It is not just a transitional risk for energy and utility companies. Physical risk from fire and flooding is a here-and- now issue for companies in many different sectors. As BlackRock CEO Larry Fink warned in his 2020 letter to CEOs, investors across the globe increasingly view climate risk as investment risk and will reallocate capital accordingly. Yet it is not clear that boards are paying enough attention. A recent EY survey found that while investors put climate change at the top their list of key global challenges that threaten business growth over the next five to 10 years, it ranks much lower for boards.

Employee shareholder activism is on the rise, especially at tech companies in Silicon Valley. But it is not a huge risk to walk off the job in protest when you are a software engineer who can get another job easily. Come the next recession, we will see if this latest strand of activism is a passing phenomenon or here to stay.

Human capital has shot to the forefront of investor concerns and business priorities, and it is here to stay for a while. Colin Mayer, in his book, Prosperity, wrote that 40 years ago, 80% of the market value of U.S. corporations was attributable to tangible assets. Today, intangible assets—patents, R&D, data—account for 85% of market value. Recruiting, managing and investing in a workforce that generates intangible assets (and tangible ones, too) will be key to success in the decade ahead.

ESG issues continue to capture the spotlight across the governance com- munity. Do you anticipate investors to continue to pay close attention to these issues in 2020 and beyond? What steps can companies take to ensure they address them effectively?

Borrus: At most large-cap companies, the low-hanging fruit of governance (e.g., majority voting for directors in uncontested elections, annual election of directors) has been plucked. Investors will, however, continue to chafe at poor governance practices and structures at smaller companies and at the propensity of a significant portion of IPO companies— especially tech unicorns—to make their debut in the public markets with dual-class stock structures, staggered boards and other management- entrenchment mechanisms.

Environmental issues, chiefly climate change risk, and social concerns—from board diversity to corporate culture to HCM and transparency of corporate political spending—will be priority issues for investors.

While sustainability reports have become a staple of investor relations, investors crave disclosures that are material, reliable and comparable. And there is a growing investor consensus around the Sustainability Accounting Standards Board’s (SASB) reporting framework for reporting on E&S metrics, and on the Task Force on Climate-related Financial Disclosures (TCFD) for climate data specifically.

The investor lens on diversity is widening beyond gender to encompass race and ethnicity, and beyond the board to include the workforce. Boards should make sure to include diverse candidates in director searches and con- sider the diversity of their employees. Harvey Weinstein’s trial and ongoing probes of attitudes toward safety at airlines will keep corporate culture on the front burner this year. Investors want to know whether the board understands the company’s culture and is taking steps to ensure that it is robust, aligned to strategy and adaptable.

When engaging investors, management and directors should be prepared to discuss their company’s culture, and they should consider appropriate disclosures about how they monitor and assess it.

What impacts on the market, if any, do you anticipate from the upcoming presidential election? How should companies prepare from a governance outlook?

Borrus: Impossible to predict! I think companies should focus on the basics: strategy for the long-term, ensuring they have the workforce that can achieve the strategy, risk oversight, bolstering transparency and governance practices as necessary, and engaging with shareholders to understand their concern.