We’ve said it here before, we’ll say it again: proactive engagement with investors is key. This means communicating clearly and actively with investors all year long. A number of factors add a sense of urgency to the task, including the current environment of skittish investors, some highly-public proxy fights, increasing cases of investor activism and the influence of proxy advisory firms on shareholder opinion. The SEC is also taking an interest in relations between corporate boards and the shareholders they are meant to serve. Howard B. Dicker of Weil, Gotshal & Manges LLP in a lengthy piece in Harvard Law School Forum provides valuable insight for this year’s proxy season.
Know your shareholders
Corporations first need to do their best to understand the range of viewpoints held by shareholders. Activist hedge funds, for instance, may push for specific near-term changes at a company, like spinning off assets. Institutional investors, on the other hand, tend to hold a longer-term view, with some calling for engagement when companies appear to be sacrificing long-term stability for short-term gains. At times, their interests converge.
One thing is certain, shareholders are becoming increasingly active in their demands on corporations. In this context, corporations need to be prepared to take on challenges from investors, even anticipating such demands by engaging with them. Don’t wait for a crisis, in fact, periods of relative calm and stability are good times to make your strategy known and demonstrate you are in tune with investors.
Be proactive, all year long
SEC Chair Mary Jo White, at the national conference of the Society of Corporate Secretaries and Governance Professionals called for companies to be proactive in building meaningful relations and clearly communicating with shareholders. Active engagement encourages shareholders to use direct channels of communication with the company as their first approach on an issue rather than launching into a shareholder proposal process.
Last April, BlackRock Chairman and CEO Laurence D. Fink sent a letter to CEOs of large companies in which BlackRock invests, asking them for “consistent and sustained” engagement with investors extending beyond the proxy season and regular earnings reports.
More strategies for engaging investors are emerging, as outlined by Dicker, including the use of online feedback forms for shareholders to communicate with a company at all times. Annual engagement calendars and regular meetings with shareholders are also gaining ground among corporations eager to establish clear lines of communications to hear from their investors.
More and more companies are adding investor engagement to duties assigned to board committees, often the nominating and governance committee or, as suggested by Vanguard, even setting up new committees with a sole focus on engagement. Tempur Sealy International, Inc., for example, recently set up a Stockholder Liaison Committee. Dicker applauds Allstate, Coca-Cola, EMC, PepsiCo and Prudential Financial for providing informative disclosure about their engagement programs.
For companies that already have specific board committees designated for shareholder engagement activities, we suggest disclosing this in the proxy, either through the use of a graphic or a paragraph or even included in the Chairman’s letter to shareholders.
Dicker also highlights the importance of transparency when it comes to engagement. He points out, however, that modes of engagement may vary according to the type of investor, different shareholders will be looking for greater transparency on different topics.
Using the proxy statement to illustrate shareholder engagement
The proxy statement is where companies should clearly and concisely present issues that affect a shareholder’s vote, such as board nominee qualifications, board renewal policies, oversight activities and the link between corporate performance and executive compensation.
We also suggest companies use their proxy statements to disclose information about their shareholder outreach efforts. This could include, for example, the nature and results of specific shareholder outreach programs, who represented the company at investor meetings, what percentage of shares were represented at meetings, how shareholder feedback was conveyed to the board, or how this feedback was used. Such information can be illustrated through graphics or even mentioned in a letter from the Chairman.