Boards behaving badly should watch out

The writer is chief executive of Norges Bank Investment Management

Norway’s oil fund has more than $1tn in assets. For a large investor like us, it is vital to express clear expectations of the boards of the companies we are invested in. Strong and independent boards that can exercise effective oversight of management are fundamental for value creation.

This week, I am at the World Economic Forum in Davos to talk to other investors and companies. Our message to them is clear: we expect boards to sharpen up. They must become increasingly effective in overseeing business strategy and management in a complex business environment.

When it comes to climate, companies planning for the status quo are failing to address growing risks and opportunities, both physical and regulatory. Those that make investments now which pay back in a transitioning economy look likely to be net beneficiaries.

We will increasingly hold boards accountable. Our higher expectations were already reflected in our 2022 voting practices. In the future, we will vote against board members if we see material failures in disclosing, managing or overseeing climate risk.

Starting in 2023, we also plan on filing our own shareholder proposals. Companies should report on climate matters and set net zero targets. Filing climate-related proposals where companies do not meet our expectations and are clear laggards sends a signal to the board that they need to step up their efforts.

We are worried that environmental, social and governance considerations are increasingly becoming a hot political topic. But ESG is not politics. It is common sense. In an uninhabitable world, the value of our fund is zero. For us, integrating ESG risk is about making good investment decisions. For companies, it is about good risk management and long-term value creation.

Then there is the question of pay. Shareholders are paying chief executives more and more every year. Median CEO pay for the S&P 500 increased by 17 per cent to almost $15mn between 2020 to 2021. In many instances, this has not been driven by corresponding value creation over the long term.

In 2022, we reviewed our voting policy on particularly generous pay packages, defined as those that are potentially dilutive or which include grants that are unusually costly compared to peer companies. We will focus on chief executive pay packages of $20mn or more, and on cases where outcomes are unusually costly, and the incentives do not clearly align with shareholders’ interests. In these instances, we have more stringent requirements for a good structure, such as a five-year time horizon for equity vesting.

We have long called for separation of the role of chief executive and chair. The chair’s responsibility is to ensure that remuneration is in line with value creation, and a dual role could compromise this. During the past decade, the share of US public companies with a combined chair and chief executive decreased from about 40 per cent to around 34 per cent. This is positive, but there is still a long way to go.

Another vital ingredient for strong boards is a broad range of perspectives, competences and backgrounds. This is crucial for board quality. We expect boards to have at least 30 per cent representation of each gender, and we will increasingly vote against those that fail to meet this condition.

As an investor, we clearly have a financial interest in speaking up. More broadly, though, I believe it is important to reflect on the social context of companies’ operations and their role as managers of human capital.

At a time when the cost of living is climbing, it is not sustainable to increase executive pay aggressively while average wages lag far behind. There has never been a worse time for corporate greed.