Shareholder Engagement Trends and Considerations
Shareholder engagement is an essential consideration for companies that wish to communicate their long-term strategies and for deepening relationships with their investors. Boards are also becoming more involved in the process.
According to a 2019 survey by PcW , 51% of directors said that a member of their board, not the CEO, had engaged directly with a shareholder in the past year. According to another survey by KPMG in June 2019, one-third of over 300 directors, senior executives, and legal advisors reported more significant board engagement with shareholders over the last 2-3 years than in the past. The results are that director engagement has increased, leading to a positive impact on shareholder voting and investing decisions.
In this article, we discuss the latest trends in shareholder engagement and considerations essential for companies and their board members in creating and implementing an effective strategy for communicating with investors and others, both during the proxy season and in the off-season.
Communication with investors no longer happens only during the proxy season. Today, investors and companies benefit from all-year communications. Surveys have shown that 87% of respondents said that proactive and regular engagement with the board helps them in evaluating a company’s culture, purpose, and reputational risk.
Companies have increased their engagement with shareholders during the “off-season” meetings, too. These meetings help companies to establish a basis for communication with shareholders and increase the probability of shareholder support when there is a situation that causes disagreement, such as an aggressive shareholder proposal or proxy vote.
In 2019, shareholder proposals were withdrawn at higher rates than in previous years. This is an indication that productive engagements took place between companies and investors. According to a 2019 survey by ISS, about 46% of environmental and social proposals filed in that year were withdrawn, compared to prior seasons that had lower withdrawal rates of 35% to 40%.
Several companies, after successful engagement efforts with shareholders, committed to an increase and improvement in disclosure of topics such as sustainability, social responsibility, diversity, and political spending. Some businesses committed to consideration of more diverse candidates for board member and executive officer positions, as well as agreeing to set renewable energy targets.
For instance, Trillium Asset Management submitted various proposals to companies, requesting reports on the diversity of the executive leadership teams. Their requests eventually withdrew such proposals at various companies after the successful engagement that resulted in commitments to strengthen public disclosures related to workforce diversity and inclusion or to offer such information in a report. This indicates a positive trend that shows shareholders and companies are communicating more effectively and more often. It’s also an indication that companies and boards can definitely benefit from continuing to improve their engagement process.
Larger institutional investors appeared more focused on financial and strategic matters during engagement. According to Blackrock’s 2019 annual report, they determined that boards needed to be more fully engaged with management on the development and execution of a company’s long-term strategy. About 46% of Blackrock’s engagements during that same year dealt with long-term corporate strategy and about one third of their engagements included several meetings with the same company, always discussing strategy.
Institutional investors are focused on identifying companies and implementing corporate strategy, and they expect the board to oversee such execution and be willing to engage with investors on the company’s strategy.
The overall trend is toward increased analysis by investors on board composition and director experience, expertise and ability to understand the company and its strategy to create value in the long run. Investors also said that independence and the skills of directors were critical to evaluate individual board members.
Another trend in investor concerns is disclosure. Shareholders want more than to only request additional information. They also focus on the equality of the disclosure, specifically in regard to specific topics such as human capital management and climate change. Investors would prefer more detailed disclosures when a factor is essential to a company’s business, such as a discussion of fair labour practices for a clothing company. Investors will become more sophisticated, making it essential for companies and boards to strategically prepare and respond to these and other investor concerns.
Considerations for Future Proxy Seasons
For future proxy seasons and engagement with shareholders, companies, and boards must consider the following in developing effective strategies for engaging with shareholders and communication with additional stakeholders:
- Be informed and aligned with management in the development of a company’s long-term strategic vision. The board needs to revisit the long-term plan for the company each year.
- Ensure there is consistent communication with all constituents. A unified and consistent message with powerful communication increases support for the company’s long-term plan.
- Be specific in identifying a company’s purpose and culture, as well as demonstrating how it informs the company’s plans for growth and financial performance.
Know Your Investors
- Identify the company’s major shareholders and key stakeholders
- Review the investors’ published guidelines, policies, statements, voting, history, and involvement in campaigns for shareholder proposals, governance initiatives, or activism.
Review and Revise the Disclosure
- Include voluntary disclosure regarding current engagement with shareholders, feedback received from shareholders, and how the company responded. Many companies are providing this information in their proxy statements in the summary, corporate governance, and executive compensation sections.
- Provide more detailed information specific to the company, its business, and risks.
- Take investor concerns into consideration when creating and updating public information, including disclosure, presentations, websites, CSR reports, and other public forums, including social media.
Focus on Key Topics
- Focus on how ESG topics relate to sustainability and the company’s long-term plan.
- Highlight steps the company is taking to ensure value creation is not hindered by adverse impacts coming from neglect of ESG issues.
- Consider linking executive compensation practices to strategy and performance, including financial, operational, and increasingly sustainability measures.
Process Considerations for Engagement
Determine who is authorised to engage directly with investors:
- Management participants almost always include the head of IR and may include the CFO, the GC, or the corporate secretary to discuss governance items; the CEO if there are controversies in the market relating to strategic direction; and, in some cases, the heads of specific business units of interest.
- Many engagements involve a non-management director (the board chair or lead independent director and compensation committee chair often engage with investors).
- Many large institutional investors expect to be able to engage with a director.
These are the key shareholder engagement trends and considerations for now and in the future. Effective engagement is essential for companies looking to communicate their long-term strategies while deepening relationships with their investors.
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