Guide to Enhancing Shareholder Engagement in the Corporate Sphere
In today’s landscape, shareholders are progressively calling for enhanced corporate responsibility across diverse areas, spanning from remuneration and human capital management to governance and board inclusivity, among others. Consequently, companies are finding it imperative to explore effective strategies for engaging with their key shareholders. The avenues for such engagement vary, including disclosure through proxy statements, investor relations activities, earnings calls, and roadshows.
This comprehensive manual is dedicated to exploring direct engagement between a corporation and institutional shareholders, specifically outside of contested elections. Whether a company seeks to connect with its key shareholders to address specific governance or executive compensation concerns, or as part of an annual or ongoing effort to nurture positive relationships, certain considerations such as intent, timing, participants, and legal obligations come into play, as discussed in the subsequent sections.
The Rationale Behind Corporate Engagement Cultivating Positive Sentiment
While corporations may have diverse incentives for shareholder engagement, fostering robust connections with key investors should stand out as a primary objective. For numerous businesses, this entails major institutional investors, including index funds, who maintain long-term stakes in the company’s stock. Regular dialogues with shareholders aid companies in comprehending the rationale behind their voting choices, while simultaneously granting shareholders deeper insights into the company’s stance on critical matters like corporate governance, executive compensation, and sustainability.
Engagement can also serve as a platform for companies to request and receive feedback on proposed changes or other non-material adjustments they are contemplating. Establishing an ongoing, off-season engagement program might build investor goodwill and relationship capital, proving beneficial in times of crisis or during pivotal issues necessitating shareholder backing. Although not all annual shareholder outreach endeavours result in actual meetings, the gesture of initiating a dialogue is likely to foster goodwill.
Shielding Against Activism
Frequent shareholder engagement can serve as a preemptive measure against activist shareholders. Even a relatively minor shareholder with activist intentions can mount a credible proxy battle, diverting management’s attention and consuming valuable resources. A case in point is Engine No. 1, an activist fund that secured three board seats with a mere 0.02% stake in Exxon Mobil during their proxy fight in May 2021. Successful activist campaigns usually hinge on backing from a company’s major institutional shareholders (Exxon Mobil’s lack of attentiveness to shareholder concerns played a role in their contest). Engaging with shareholders regularly could dilute the allure of activist campaigns by demonstrating management’s willingness to interact and absorb investor feedback. An established history of engagement, particularly one where investor feedback has influenced decisions, could lead shareholders to give management the benefit of doubt when faced with activist threats.
Addressing Unfavourable Voting Outcomes
Even if continuous shareholder engagement isn’t a company’s norm, it might still warrant reaching out to shareholders on specific matters following an annual meeting. For instance, in the event of a failed say-on-pay vote or substantial opposition, a company should communicate with its shareholders to glean additional insight into concerns surrounding its executive compensation plan. Shareholders often expect companies to engage if there’s noteworthy opposition to a director or proposal. Similarly, when a shareholder proposal garners significant backing despite the board’s disapproval and management’s opposition, the company should seek to engage with shareholders to grasp the reasons driving their support.
Expectations from Proxy Advisory Firms
Both prominent U.S. proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, set benchmarks for shareholder support below which companies are advised to engage with shareholders. ISS, for instance, may recommend action against a company’s compensation committee if the say-on-pay proposal receives under 70% of votes and engagement efforts with major institutional shareholders aren’t disclosed in the subsequent proxy statement. This disclosure should encompass the nature of engagement, specific concerns raised by shareholders, and the company’s actions to address them. Similarly, Glass Lewis will assess a company’s engagement with shareholders in determining whether to oppose management’s proposal or recommendation if the proposal doesn’t gather at least 80% support. Transparent engagement efforts disclosed in the proxy statement enhance a company’s standing with these firms for future meetings. This also fosters goodwill with shareholders, even those not directly engaged.
Optimal Timing for Engagement
For most companies, the period between September and February, known as the proxy off-season, presents an ideal window for engaging with institutional shareholders. This period follows the active proxy season when annual shareholder meetings and votes are conducted, leaving institutional investors swamped with proxy-related tasks. Despite this, there are exceptions as some shareholders might be available during the proxy season for specific scenarios, such as adverse proxy advisor recommendations.
Practical factors also come into play. Some shareholders are required to file Forms N-PX with the SEC, disclosing their annual meeting votes for the prior 12 months ending on June 30. These filings are due by August 31 each year, after which the voting information becomes publicly accessible. Moreover, certain institutional investors publish annual records of their shareholder meeting votes, aiding companies in prioritising engagements based on voting outcomes.
Companies should initiate engagement shortly after voting information from their last shareholder meeting becomes available. Given the schedules of senior management and board members involved in the engagement, sufficient time must be allocated for identifying, confirming, and scheduling multiple shareholder meetings. The window for engagement shrinks considerably with the onset of the proxy season, necessitating early commencement of the process.
Engaging Amid Proxy Season
Occasionally, companies might need to engage urgently during the proxy solicitation for an annual meeting, especially if proxy advisory firms recommend against a director or company proposals, or for a shareholder proposal. Despite the truncated engagement timeframe—typically two to three weeks from the issuance of proxy advisory firm recommendations to the meeting date—companies can still engage with shareholders to address concerns and secure support. Proxy solicitors can aid in gauging shareholder sentiment and influencing voting outcomes.
Identifying the Right Audience
Institutional shareholders, including major index funds, commonly hold substantial portions of a company’s shares. For instance, in 2017, Vanguard, BlackRock, and State Street collectively held notable stakes in S&P 500 and Russell 3000 companies. Given their active voting participation, it’s prudent for companies to concentrate engagement efforts on these institutional shareholders, especially the larger ones.
Identifying institutional shareholders can be done through SEC filings like Forms 13F, 13D, and 13G, although pinpointing precise voting authority might be challenging. Some institutional investors delegate voting authority to entities or managers, adding another layer of complexity. Determining actual voting authority helps companies tailor their outreach efforts accordingly. Many institutional investors publish voting guidelines that offer insights into their likely stance on various proposals.
Companies embarking on ongoing engagement programs should prioritise shareholders with substantial stakes, often comprising the top 25 institutional shareholders. Engagement acceptance rates might be modest, but opposition-driven meetings can raise participation. Keeping track of contacted and engaged investors helps in targeting outreach for subsequent years.
Selecting Engagement Participants
The nature of engagement often dictates the composition of the participation group. Senior management members knowledgeable about the engagement’s focus typically lead the engagement team. General counsel, corporate secretaries, or human resources heads participate based on the topic. Involvement of investor relations personnel ensures seamless connections with key shareholder contacts and scheduling meetings. Continuity between financial performance discussions, like earnings calls, and governance or ESG themes enhances the dialogue.
While board members’ presence isn’t obligatory, shareholders often appreciate their participation, potentially increasing engagement’s effectiveness. Some issues, like executive compensation, might necessitate board involvement. Board chairs, lead directors, or compensation committee chairs typically address such matters.
External experts, like legal advisors or compensation consultants, might contribute limitedly. However, some shareholders oppose their involvement. Designating someone to take accurate notes during meetings aids in documenting feedback and company statements, essential for action planning and public disclosure.
Preparation for Engagement
Prior to engagement, research into shareholder voting policies and proxy advisory firm perspectives on the issue at hand is essential. These guidelines and viewpoints help tailor engagement strategies. Some shareholders, like BlackRock, reveal annual engagement priorities and quarterly lists of companies they engage with, enabling focused preparation. Mock sessions, expert reviews, and consideration of shareholder representatives’ profiles enhance readiness.
Engagement meetings usually span 30 minutes to an hour, occurring via teleconference, video call, or in-person. Structured agendas guide discussions. After introductions, the meeting lead—a senior executive or board member—offers a brief overview of the company’s operations or recent financial performance. This sets the context for the key topic under discussion. The company elucidates its stance and rationale, encouraging feedback and proposing discussions. Addressing proxy advisory firm concerns, if any, is crucial.
Companies must be prepared to discuss not only the primary topic but also related areas of interest to shareholders. For instance, after a low say-on-pay vote, discussions should extend to governance issues. Flexibility to engage on topics of interest fosters effective dialogue.
After each engagement, a debrief session allows the engagement team to review shareholder feedback, identify recurring themes, and prepare insights for the board. Documenting engagement processes and feedback aids future proxy statement disclosures. Proxy advisory firms consider disclosure when assessing a company’s responsiveness.
Companies must adhere to Regulation FD and other securities laws. Regulation FD mandates public disclosure of material non-public information to prevent selective disclosures. Disclosure through widespread public channels is required for intentional disclosures; unintentional disclosures prompt public disclosure. Engagements should steer clear of revealing undisclosed strategic or performance forecasts. Communication policies should be in place, particularly for board members involved.
To mitigate inadvertent disclosures, companies might employ slide decks or scripts containing only public information. Engagement during the proxy solicitation period could trigger filing requirements. Legal review of engagement materials ensures compliance.
Incorporating these practices will bolster companies’ shareholder engagement endeavours, aligning them with evolving expectations and fostering positive relations with investors.
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