It’s safe to say that shareholder engagement is moving in the right direction. Investors are refining their expectations for boards and certainly doing a better job communicating those, whether through published letters or aligning investor voices with initiatives like the Investor Stewardship Group (ISG).
On the board side, directors are increasingly recognizing the value of shareholder engagement. In PwC’s latest 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).
While the preparedness and productivity of these meetings continues to improve, the shareholder engagement process still mystifies many boards. As the vision of today’s institutional investors becomes more grandiose and purpose-driven, their short-term expectations can be harder to decipher — particularly when it comes to the frequency and format of these routine shareholder engagements.
If an investor has an issue with your company strategy, leadership or board composition, rest assured that they will be in touch. In all other cases, however, directors can begin to feel like the Goldilocks of today’s boardrooms – determining whether their efforts to engage are too much, too little, or just right.
We’ve pooled insights from several recent episodes and interviews to offer some engagement guidance in today’s rather complex shareholder landscape.
One message doesn’t fit all.
First, it’s important to recognize the spectrum that exists within the investor community, explained Bob McCormick, former Chief Policy Officer with proxy advisor Glass Lewis (now partner with CamberView Partners), in a recent episode.
At one end of the investor spectrum are the active managers, who know their companies very well; who have a team of fundamental analysts; and who regularly engage with the head of IR, the CFO or even the CEO. Engagement with these investors needs to happen at a more granular level, explained McCormick. Active managers need to be notified and understand any changes to company strategy or leadership. That way, when proxy season rolls around, they have a full picture of your company and can vote accordingly.
At the other end, the passive managers (often the big index funds) may only engage with a company once a year or not at all, and there’s often less internal expertise on the company performance or strategy.
“[For] the big index funds, you really need to make sure that you educate them on the fundamentals of the company…,” explained McCormick. “Particularly if it’s a small- to mid-size company, they may not be familiar with that exact business or the change in strategy or cyclicality of that industry. You really need to make sure they understand [whether these things impact] the design of the compensation program or the governance structure of the company.”
For more institutional investor views on engagement frequency, see Highlights: Investors Board Performance Review (starting at minute 15:30).
Things to consider: Where does a particular investor fall along the active/passive spectrum? What’s your engagement history with the investor? How familiar are they with your existing strategy and leadership? Tailor your approach accordingly.
Have a clear purpose for engaging.
Every request for an investor meeting should have a purpose, emphasized Michelle Edkins, Managing Director & Global Head of Investment Stewardship for BlackRock, in our Investor Board Performance Review.
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
When requesting a meeting, boards should ensure they have a hook, explained McCormick. Maybe it’s a change in strategy or management or board leadership, but there needs to be some new development that warrants the meeting request. Boards should have something specific they want to achieve or communicate.
It’s important to remember, said McCormick, that a major institutional investor with 10,000+ portfolio companies will necessarily focus the most time on their “problem companies”.
“So if your company doesn’t have concerns, and the investor declines the meeting, that could be a good sign,” said McCormick.
Things to consider: On the other side of this meeting, what do you hope both sides can come away with? Your answer to this question should be inherent in the meeting request and agenda.
Be prepared to have a conversation.
It’s critical that your board is prepared. DO send the agenda ahead of time. DO make sure the right people are present for the meeting. However, once the meeting starts, boards should be prepared to have a conversation.
“The least productive engagements are those where there’s a 40- or 50-page IR deck, and the executives [or directors] flip through that as if it’s a presentation,” said McCormick. “That’s not a very effective way to start a dialogue.”
The best format, advised McCormick, is a short deck that functions as a “leave behind” for the investor: What’s the company? What’s their business? What changes are happening? How’s the compensation program structured? In the meeting, directors should focus on creating a dialogue that fosters understanding around the company strategy.
For more on shareholder engagement expectations: 5 Investor Expectations for Shareholder Engagement.
Things to consider: Think carefully about who should be in these meetings. Which members of the board and leadership team would be comfortable with this format and capable of addressing investor questions? A combined team of three to four directors and executives is generally advisable.
Understand what’s motivating investors.
As boards strive to answer the call for more disclosure and engagement, it can be easy to forget what’s motivating these investor requests in the first place. As more and more capital comes under the management of institutional investors, leaders like BlackRock’s CEO Larry Fink are recognizing that it all ties back to the financial sustainability of today’s companies–a vision he’s looking to boards and management teams to communicate.
Just as the responsibilities your company faces have grown, so too have the responsibilities of asset managers. We must be active, engaged agents on behalf of the clients invested with BlackRock, who are the true owners of your company. This responsibility goes beyond casting proxy votes at annual meetings – it means investing the time and resources necessary to foster long-term value.
— BlackRock CEO Larry Fink in his Annual Letter to CEOs
At Corporate Board Member’s 2018 Boardroom Summit, Glenn Booraem, Principal & Investment Stewardship Officer at Vanguard, emphasized that investor efforts to influence governance are simply a means to an end. Diversity initiatives, for example, are not intended to strongarm companies–rather, to instill confidence that the board has the necessary perspectives and skill sets to oversee the company through its long-term growth strategy.
Boards should remember that the fundamental purpose of these meetings is to open a dialogue, build a relationship, and simply communicate to investors why the board and company strategy are well-positioned to grow the company into the future.
Things to consider: Familiarize yourself with the perspectives and philosophies of each investor. A meeting with State Street Global Advisors is likely to include a discussion of gender diversity, while another investor may focus more heavily on socially responsible investing (SRI) or environmental issues. Ensure you have the right people in the room, and again, tailor your message accordingly.
As quickly as today’s shareholder landscape is evolving, there’s not one “right way” to engage. The best rule(s) of thumb the board can follow: (1) Keep up with the guidance/letters published by your major investors, and (2) reach out when you have something substantive to discuss. Remember, you may have to try a few bowls of porridge before you find that one that’s just right.