BoardMatters Quarterly, April 2013
Preparing for shareholder engagement
What directors should know
Company-shareholder engagement is reshaping the governance landscape. Shareholders are providing more input into corporate governance decisions and gaining more access to management teams and directors. They’re using this engagement and proxy disclosures to evaluate the company’s governance practices and board effectiveness.
Management is more willing to discuss certain issues with shareholders and strengthen proxy disclosures on governance topics. To develop an effective engagement plan, the board and management need to understand investors’ interests, voting records and engagement approaches.
With some consensus among investors around topics of interest and practices, boards may be able to formulate an engagement plan and communication strategy. Common steps may include the following:
- Enhance disclosure. Enhancing disclosures in the proxy statement is the first step a company can take to support engagement with shareholders. By explaining the board’s decisions on governance matters, companies can avoid misunderstandings.
- Prepare for dialogue. Management and the board should review investors’ policies, voting records, investment strategies and interest in governance before holding any meetings. Agreeing on the agenda and the purpose of the meeting beforehand also will help both sides determine that they have the right people at the meeting and have appropriate expectations.
- Decide who should be involved. Having board or committee members talk with investors when appropriate can help build investor trust and confidence in the board’s performance and prevent issues from escalating to public campaigns. Involving a variety of investors — beyond the top 10 or 15 — in outreach efforts can help companies gain diverse perspectives and build relationships with small but vocal investors that might otherwise rely on shareholder proposals to trigger direct dialogue. Companies should be cognizant of the requirements of the U.S. Securities and Exchange Commission’s (SEC) Regulation FD, so that meetings do not result in the selective disclosure of company events or operating results.
Common engagement topics
Investors are sending letters to directors, submitting shareholder proposals and holding discussions with company management and boards. According to our analysis of the 2013 proxy season, the most common shareholder engagement topics are the following: 1
- Board elections, leadership, composition and diversity
- Corporate political spending and lobbying activity
- Corporate social and environmental practices and disclosure
- Executive compensation
- Audit committee oversight, particularly enhanced disclosure around the audit committee’s role in establishing and monitoring important aspects of the audit-firm relationship
Respond to shareholder letters and proposals. Investors want to be sure the board is aware of investors’ interests and generally want to better understand the board’s views about how these governance topics are managed. By engaging with shareholders and responding to shareholder correspondence in a timely manner and not responding defensively, over time, companies may avoid receiving shareholder proposals. Many shareholders file proposals to raise ideas in a constructive way so that their views are considered by the board.
Keep an open mind. Demonstrating a willingness to learn, evolve and seriously consider an investor’s view may help companies gain investor support, even when an agreement cannot be reached. Investors are generally more willing to resolve issues outside of the proxy process and the media spotlight when companies take the time to understand their concerns and consider the merits of their proposals.
Engagement can be an opportunity
Companies can benefit by building trust, establishing a mutual understanding and maintaining constructive relationships with investors. By taking these steps, companies may be able to secure support for proposals that they put to a shareholder vote. Companies also may be able to identify earlier in the process potential issues that require attention.
Questions for the board to consider
- Is there a process in place to deal with requests from shareholders for dialogue and are these requests shared with the board?
- Does the board understand the governance views of the company’s largest shareholders?
- Has the company identified shareholders beyond the top 10 or 15 that are active filers of shareholder proposals?
- Has the board identified directors who could speak with investors?
- 1 Proxy season 2013 preview: Insights on topics of investor focus and expectations of engagement, Ernst & Young LLP, March 2013.