By Karen Kane

With institutional investors such as BlackRock, State Street Global Advisors, and Vanguard hiring their own experts on executive compensation and environmental, social, and corporate governance (ESG) issues, it is clear that those issues will continue to be important matters for all boards of directors.

What should not be overlooked, however, is that as institutions have insisted on engagement with boards of directors, the directors have responded. “It’s the impact of activists and of say-on-pay,” observed Ken Bertsch, executive director of the Council of Institutional Investors. “Directors now interact with investors. They didn’t used to interact, but now they do. It’s accepted.” It’s a sea change that is likely to continue for some time, even if “say on pay” requirements were scaled back as a result of the Trump administration’s action on Dodd-Frank, because investors have come to expect this input and there’s no closing the barn door.

“As the world’s largest asset manager and a large provider of index funds, we engage with companies where we believe our voice can protect our clients’ long-term economic interests,” said Zachary Oleksiuk, CFA, head of the Americas for BlackRock Investment Stewardship.

Talent and expertise at the likes of BlackRock and State Street Global Advisors (SSGA) have never been stronger—from expertise in executive compensation, law, and ESG to tapping those who have worked at the leading proxy advisory firms. Oleksiuk himself is a CFA. While he has never managed a portfolio, “I saw the convergence of governance with investment decision-making and understood the importance of thinking and speaking like an investor.”

“Governance is much more integrated than it was,” said Bertsch. “But that's not everywhere and there is still more work to be done. Financial analysts are learning more about governance (including through the CFA), and there’s more financial understanding on the part of investor governance teams. In the past, when I worked with portfolio managers, sometimes they just didn’t understand boards of directors, either in general, in terms of good practice, or in terms of the potential strengths and weaknesses of a particular board. There’s more understanding now.”

“ESG issues are becoming more mainstream,” said Anne Sheehan, head of corporate governance for CalSTRS, citing the work that SSGA and others have done.

After the Paris climate accord and a number of shareholder proposals on climate change last year, SSGA took a leadership role by publishing a framework for evaluating climate risk—“not as an esoteric exercise but as low-probability, high-impact factors that are critically important in a long-term investing environment,” said Rakhi Kumar, managing director, head of corporate governance at SSGA. “We’ve moved away from ‘check the box’ to ‘look at what is needed for a particular company,’ ” said Kumar.

“It’s about how you are improving the bottom line,” added Sheehan. “If you’re recycling water, it is making you more efficient, and achieving better returns while being good for the environment.

Institutional investors are no longer passive.

“We believe we have a role to have a wider debate as governance is evolving,” said Kumar.

Yet neither BlackRock nor SSGA are in the business of telling companies what to do. “We raise questions in meetings. We have our own guidelines and expectations, but also recognize companies may have their own approach to governance. Engagement and dialogue give us an opportunity to evaluate the quality of leadership within the boardroom,” said Oleksiuk.

“Compensation is a perennial issue,” said Sheehan. “Pay for performance is a management issue, a culture issue, and a moral issue. It’s a window into the company’s management of human capital.”