As investors of all kinds become more active in company governance, today’s boards of directors are expected to engage with their shareholders outside of standard proxy disclosure. Largely led by the institutional shareholders, today’s investors want to know a company’s strategy, board composition and governance practices will lead the organization down a path of long-term success. In an episode dissecting BlackRock’s 2018 annual CEO letter, Judith Samuelson, Vice President & Executive Director of The Aspen Institute’s Business and Society Program, offers her perspective:
“By talking about purpose and long-term strategy, [investors are] opening up a question about the business model–not about the social initiatives…,” said Samuelson. “[They’re] really asking about: What’s the DNA of this company? What are you really about? How are you defining your long-term strategy? How are you going to measure success?”
Not only are investors doing a better job communicating their expectations for shareholder engagement, but boards are answering the call—and they’re also recognizing the value of these interactions. In PwC’s Annual Corporate Directors Survey, 76% of directors indicated that their board received valuable insights from shareholder engagement, while 77% believed that their engagements positively impacted proxy voting (up from 59% in 2016). In the sections below, we outline key trends, examine proxy statement best practices, and offer resources for avoiding attention from shareholder activists.
Communicating ‘Sense of Purpose’
A large influx of capital into passive index funds (now comprising 42% of all publically traded funds) has put more pressure on today’s institutional investors to align themselves with their investors and focus on long-term returns. In turn, major investors like BlackRock, Vanguard and State Street Global Advisors have been vocal about their investment philosophies, which place varying emphasis on board diversity, governance practices, environmental and social issues. Often using a broader ESG narrative (i.e., environmental, social & governance), investors feel that these issues are at the core of long-term value creation and risk mitigation at today’s companies.
For boards of directors, the broad focus on ESG can feel all-encompassing or ambiguous—and often leaves boards wondering what to prioritize. Board mustn’t get caught up in the semantics or lose sight of the bigger picture, explained board member Alex Wolff in a recent panel with BlackRock and the AFL-CIO:
There’s a lot of misunderstanding and a sense that maybe investors are putting dictates down—that they’re [offering] very narrow definitions or a political agenda. And that’s not really the case. If you look at the actual results of the engagement or the letters that are put out, I think there’s much more subtleness and flexibility…From a director’s standpoint, our job is to look after the shareholders. And if [ESG] is a concern shareholders have, we need to be looking at [it] seriously.
– Alex Wolff, Board Member, Albemarle Corporation
How and When to Engage
As boards ramp up their shareholder engagement efforts, they must remember that one size doesn’t fit all. Active managers will have different informational needs than passive managers, while specific investors will vary in their priorities and engagement philosophies. In a recent article, we outlined several guidelines for shareholder engagement as boards strive to decode investors’ expectations. Bob McCormick, Partner at CamberView Partners and Former Chief Policy Officer with proxy advisor Glass Lewis, reminds board members that if investors or proxy advisors decline meeting requests, it could be a good sign that they don’t have red flags to discuss.
From [BlackRock’s] perspective, we want to engage with the director when there is something substantive to discuss. And by substantive, [we mean] when you go into the meeting with an expectation of what you are going to come away from that meeting with.
– Michelle Edkins, Managing Director & Global Head of Investment Stewardship, BlackRock
While the proxy statement is a regulatory requirement, it can also serve as an effective tool for shareholder engagement. As investors request more visibility into the boardroom, the proxy statement can be a valuable mechanism for telling the board’s story around CEO pay, diversity, board evaluations or ESG–and how all these pieces relate to the long-term strategy.
I’ve heard people say: ‘Good disclosure is explaining that you have a process. Better disclosure is explaining what that process is. Great disclosure is explaining the results of that process.’
— Ron Schneider, Director of Corporate Governance Services at Donnelley Financial Solutions
In a series of blogs and episodes, we discuss key disclosure trends related to peer group selection and board composition; we also share best practices for proxy statement design, organization and messaging. For a comprehensive view across proxy disclosure, don’t miss Donnelley Financial Solutions’ Guide to Effective Proxies, which gathers best-in-class examples for nearly every section of the proxy statement–from ESG disclosure to skill matrices.
Successful shareholder engagement efforts will require boards to have the right information at their fingertips. How does your board composition or CEO pay compare to your peers? What skill sets is the board lacking? What conflicts of interest might your investors have uncovered?
Shareholder Data in Your Diligent App
Quick access to information helps board members identify governance red flags raised by shareholders and activists. Click here to learn how Diligent’s Nomination & Governance module is driving these types of insights.