In this article, representatives of The Conference Board and Rutgers Law School discuss the current phenomenon of director engagement with shareholders. While company managements have long engaged with shareholders at annual meetings and investor presentations, the notion of director engagement with shareholders is a more recent development. Why is shareholder engagement increasingly being added to the job description of the corporate director? The article posits several theories for the trend and, based on a survey of corporate secretaries, general counsel and investor relations officers at public companies, identifies the most common engagement topics, provides data on frequency of engagement and highlights emerging practices related to director engagement.
The authors finds the roots of the phenomenon in the enhancements to corporate governance arising out of SOX and Dodd-Frank, together with the demands of the so-called “shareholder rights movement,” as a result of which shareholders have increasingly expected direct access to board members. More specifically, the authors attribute the shift toward director engagement to three key factors:
- Say-on-pay. The introduction of “say on pay” led to a reduction in the number of shareholder proposals related to executive compensation and a rise in the incidence of proactive engagement on comp issues. Typically, these engagements occur well before proxy season, especially with large institutional investors that can be instrumental in garnering a favorable vote. Although some shareholders are continuing to pursue comp-related proposals on more cutting-edge topics, such as equity retention, limitations on golden parachutes, clawback policies and gender pay gap disclosure, “hardly any company,” the authors contend, “can afford to walk into an AGM without having spent the preceding months gaining assurance of the broad consensus on its compensation policy.”
- The authors argue that “activist investing has matured into an asset class of its own, widely recognized as the driving force behind several governance developments—from proxy access to corporate political contribution disclosure.” These activists have demanded significant attention. The authors observe that activist investors have a variety of different motives and investment strategies, and range from “short-term speculators” to public pension funds, index funds and other asset managers that view improvements in corporate governance as necessary for long-term growth and tend to seek engagement and compromise rather than confrontation.
- ESG investing. With the mainstreaming of corporate social responsibility and sustainable investing, particularly at asset managers such as BlackRock and State Street, traditionally passive institutional investors now “have had the clout to command immediate attention by boards of directors.”
The authors identified the following as key insights from the 2018 study conducted by The Conference Board and Rutgers University’s Center for Corporate Law and Governance:
Engagement topics. The authors identified as the most common topics for board-shareholder engagement:
- executive comp, including type of equity-based awards for executives, with specific issues varying based on company size (smaller companies—weight of base salary and annual bonuses in pay mix; larger companies—incentive plans);
- choice of performance measures, targets, thresholds and maximum payouts for executive incentive plans (almost half of financial services sector);
- board diversity; and
- sustainability reporting (more than one-third of the manufacturing companies).
Engagement policies. More common among larger companies, especially in the financial sector, these policies tend to cover:
- how to set up an engagement with directors;
- allocation of responsibilities among the board, investor relations and senior management;
- board member leading the engagement process; and
- permissible topics for engagement.
Frequency of engagement.
- frequency directly correlates to company size;
- financial services companies report highest percentage of companies (26.3%) with >10 instances of engagement in the last 12 months, and one-third of that quarter of companies had > 25 engagements in the same time period);
- only 10% of largest revenue companies (compared to 42% of smallest revenue companies) reported no engagement in last 12 months;
- majority of companies reported an increase in frequency in the last three years;
- larger companies more proactive in initiating engagement; and
- boards of financial companies especially proactive, “with almost half of respondents from that sector indicating that in 75 to 100 percent of cases [it was] their boards that reached out to investors and initiated a dialogue.”
Duration of engagement.
- mostly short term, with many involving only a single exchange;
- large financial services companies reported highest incidence of at least one engagement exceeding six months duration; and
- most engagements occur outside of proxy season.
- mostly large passive asset managers, especially for larger companies;
- hedge funds are next across business sectors and sizes; and
- public pension funds are most frequent for smaller companies.
- letter and email exchanges (more commonly used by smaller companies);
- phone (or video) calls;
- in-person meetings;
- “fifth analyst calls” (separate call with institutions dedicated to corporate governance) rarely occur; and
- recent experiments with shareholder surveys (especially for pay practices) and e-forums (to reach retail investors).
Leadership of engagement process.
- typically lead independent director at large companies;
- CEO or the board chair at smaller companies; and
- >60% of largest companies involve general counsel.
- most frequently cited outcome is change in a corporate practice (e.g., adoption of majority voting or independent chair);
- except, however, in financial services, where half reported engagement advanced dialogue, but no other outcome;
- study showed board engagement “not often used as an expedient for persuading one or more investors to withdraw a shareholder proposal.”
- when provided, disclosure “tends to articulate the company’s commitment to dialogue with investors, the frequency of recently held instances of engagement, and the topics addressed in those occasions”; and
- financial organizations had proportionally most disclosure of engagement outcomes.
Impediments to engagement.
- time constraints on shareholders;
- for larger companies, time constraints on board members;
- management considerations and regulatory concerns are “among the least relevant restraining factors”; and
- many companies restrict discussions to publicly available information.