What Do Investors Want From Directors? Board Votes on Strategy, Succession Add Most Value, Research Indicates

What do institutional investors want from boards? Of course, investors—whether in private companies or public companies— want an above-market return, according to Harvard Business Review’s “How Venture Capitalists Make Decisions” and NACD’s Corporate Governance and Financial Performance Link FAQ.

But which governance practices are currently valued by investors? If you serve on, report to, or advise the board of a private or closely held company, you probably know the answer because you see your owners in action as board members. But if you serve a public company, determining shareholder expectations can be more difficult.  

Understanding investors’ goals requires a careful study of clues. One clue is what they are saying in face-to-face meetings. Another is how investors are using the proxy voting system—resolutions they are filing, voting guidelines they are following, and how they are casting votes. Lastly, an often–looked clue is what stocks investors trade—as indicated by portfolio investment policies and real–time buy or sell decisions.   

Each company will have a set of investors with unique goals, and for companies and boards seeking a stable, long-term ownership base, it is helpful to know investors’ typical goals. Share ownership is not fixed; portfolio turnover can rise to 30 percent, although 5 to 8 percent is the goal, as described in Marcellus’s Consistent Compounders Portfolio. While current dominant trends of investors goals may vary across all three domains—board-shareholder meetings, proxy voting, and investor buy or sell decisions (via both stated policy and via market behavior)—investors care most about two main issues: where the company is headed (strategy) and who is leading the company (CEO succession), which in turn drives their interest in board voting rules and other governance mechanisms.

Issues in face-to-face meetings. NACD’s recent article on “Board-Shareholder Engagement Focusing on Strategy” explains that in face-to-face meetings, strategy, risk management, and CEO succession dominate investors’ concerns. Also, nearly half of all respondents to NACD’s 2024 Trends and Priorities Survey said that their investors focused on company strategy in their in-person meetings, with no significant difference in company size, and that CEO succession was the second most common topic discussed among larger companies. 

Results of proxy voting. Under Rule 14 (a) 8, proxy resolutions may not address “ordinary business,” so they have traditionally been limited to compensation or environmental, social, or governance issues. However, according to the Wall Street Journal’s “Is Your 401(k) Destroying Capitalism,” there have been new kinds of shareholder resolutions pertaining to strategy over the past five years, namely “allocation to maximize shareholder value, corporate purpose, and factors affecting long-term value.” While none of these have passed by a majority vote, they do show shareholder interest in strategy. Meanwhile, governance remains the route to affecting strategy. So far this year (through August 28), only five out of the nearly 400  shareholder resolutions filed at Fortune 250 companies have been passed by more than 50 percent, and these rare, winning proposals are about  shareholder voting power, according to proxymonitor.org (using advanced search).

Buy-sell philosophy and behavior. Over roughly the past decade, when it comes to buying and selling US stocks, more than $2 trillion has gone into index funds, while at the same time more than $2 trillion has been leaving managed funds. Individual corporate strategies may not seem to matter very much. However, when choosing indexes, strategy matters greatly. For example, State Street Strategic Asset Portfolios chooses its investments based on over 130-member investment team, which “constructs the portfolios based on proprietary long-term return, risk and correlation forecasts.” And when individual corporate strategies are in doubt, investors often sell their holdings, according to Nasdaq’s “The Top Stocks Sold by Institutional Investors.” 

An ongoing, long-term study by INC. on Profit Impact of Market Strategy has shown that strategic factors such as asset allocation and vertical integration account for most of the variation in profit. Additionally, Harvard Business Review’s “Wall Street Rewards CEOs Who Talk About Their Strategies” analyzes a 2015 Oxford University study found that stock prices rise when CEOs discuss strategy in presentations to investors—on average by two percent on the same day and five percent within four days. More recently, three separate studies showed that green strategies, diversification strategies, and digital transformation strategies were all associated with a lower incidence of stock price crashes.

It is clear that investors express themselves in three main ways: meetings, proxy voting, and stock buy or sell decisions. In all these domains, their main concern continues to be strategy and leadership. Accordingly, boards should not overreact to activists’ proxy votes and resolutions; they need to look at the big picture, including shareholders’ buy or sell decisions.