Navigating the company-investor landscape
Navigating the company-investor engagement landscape
Most large companies participate in some degree of engagement with institutional investors on corporate governance topics. In a growing number of instances directors have participated in that dialogue.
These interactions, initially driven by mandatory say-on-pay proposals and increasingly expanding to cover other topics, defined the last two proxy seasons. Company-shareholder engagement will continue to be a primary theme in 2014, one that is likely to be of interest to corporate boards.
In late 2013, EY’s corporate governance team connected with nearly 40 institutional investors, investor associations and advisors to learn about their governance priorities. What we learned may help companies and their board members better understand what’s on the mind of investors and prepare for engagement to make those interactions more productive.
Engagement can be a strategic opportunity
A commitment to ongoing dialogue with investors on corporate governance topics may help companies to:
- Secure investor support
- Mitigate potential exposure to activism
- Counter check-the-box proxy voting
- Identify emerging opportunities
Five tips for successful engagement
The investors we talked with shared their first hand experiences on corporate practices. Key takeaways to more successful engagement include:
1. Investors are not one-size-fits-all: Investors may share some corporate governance goals — and may even work together to achieve them. However, their specific priorities, asks of companies and approach to engagement often vary significantly. Company representatives are not expected to be experts on each investor, but discussions are more productive when there is a basic understanding of investor priorities.
2. The heart of engagement is listening and relationship-building: A critical component of engagement is providing institutional investors with confidence that their voices are being heard and their views are being communicated to the board. A company’s responsiveness, messaging and tone can be as important as the topic of discussion. Most investors prefer to have a dialogue, find common ground, and reach agreement — even if their specific ask is not agreed to by the company.
3. Avoid “engagement for engagement’s sake” … but know when to engage: An introduction to establish a channel for communication can be significant. However, a meeting is not always necessary — an introductory phone call or email can be sufficient. Like companies, investors face resource constraints. Don’t wait until there is an issue before initiating investor outreach — develop these relationships outside of season so you can call on them if necessary.
4. Preparation is critical to success — a little homework goes a long way: Agreeing to an agenda beforehand helps to set expectations for meeting outcomes, and ensures that both sides include the right people. Although board level involvement is not always needed for engagement to succeed, directors should be involved in certain situations. Also, all involved should be fully prepared, knowledgeable about the topic under discussion, and active participants.
5. Focus on company-specific decisions and look past the views of proxy advisory firms: In direct company-shareholder conversations, avoid complaints about proxy advisory firm views and recommendations. Most large investors tend to be sensitive to assumptions that, as a group, they blindly follow the vote recommendations of proxy advisory firms. Instead, demonstrate knowledge of why company-specific governance practices are appropriate taking into account broader trends and peer practices. And make the best use of your engagement opportunity by focusing on what investors want to know and demonstrating appropriate board-level attention to these topics.