Shareholder Engagement

The New Norm: Engagement

In the world of governance, you are often an outlier by virtue of what you are not doing, rather than by what you are. This is most certainly the case with proactive shareholder engagement.

There is an expectation from investors for companies to proactively engage, with 81% of respondents to a CGIC investor study stating this is an important process.

Blog engagement graphic 1

The largest institutions, especially passive funds, place the most value on direct engagement and set the highest expectations for this to occur. As we have commented previously on the blog, many have clearly disclosed practices and procedures to enable them to maximize their time and issuers to understand the importance of this in their view.

Blog engagement graphic 2

If you have not started to plan your off-season engagement, now is the time! Investors can struggle with bandwidth issues, so you need to plan ahead to try to get time on their calendar. You may also want to avoid blackout periods, such as around earnings and investors days. The perception that all companies should engage all investors all of the time is neither accurate nor realistic. But what is the right balance and how can you elevate your process to ensure you are meeting internal and external expectations?

Unless you are an outlier with existing governance or compensation concerns, or believe you may have down the road, you need to understand the issues that are motivating to each investor. Detail agenda items that are appealing and relevant to them in order to encourage the investor to take the meeting. A simple response of, “Thanks, but we’re OK right now,” isn’t always the worst thing, but as the exercise is to eliminate doubt, gather vital feedback, and to establish and strengthen relationships, especially with passive funds and larger investors in general, it is best to do everything possible to avoid this response.

The main questions to consider as you plan your strategic outreach and look to maximize your effectiveness are:

  1. Which investors am I going to reach out to first?
    • Just top—10/20?
    • Are there investors further down my registry that I should contact, and why?
  2. What about passive investors?
    • Are there special considerations for engaging passive investors?
    • What role does IR play here?
  3. Who are the right people for me to contact?
    • Is it just the governance or proxy contact?
    • What role does the PM or analyst play?
    • What is the real impact of ISS and Glass Lewis?
  4. Who is on my engagement team?
    • What is the role of IR, legal, Corporate Secretary, etc.?
    • Do I need representatives from other areas, such as Comp and Benefits, or Sustainability?
    • What role do my directors play?
  5. What is my message?
    • Is it just the same as last year? Is that appealing to my investor?
    • What are important issues for my investors, have their policies changed?
    • What are general “hot topics” right now and how can I approach them?
    • What are my specific strengths and challenges as perceived by my investors?
  6. ESG
    • What role does ESG play in this?
    • What is my message on Corporate Responsibility?
    • How do I rate relative to investor concerns, my peers and my sector?
  7. Consistency
    • How should I maintain a consistent message in my proxy disclosures?
    • Should some of this information be included in other investor communications/materials?
  8. Internal communications
    • How do I communicate my strategy to senior management and the board?
    • What expectations should you have for the process and how do I manage these internally?
    • Are their additional items to consider, such as activism?

We don’t need to overcomplicate this process, but with proper planning, we can create a refined strategy to ensure that you are achieving your objectives and delivering a strong, consistent and clear message to all investors.

We are here to partner with you to help answer these questions and meet these challenges.

 

 

CalSTRS Focus on Facebook

In the wake of highly publicized recent data privacy breaches, concerns over the governance structure at Facebook are once again taking center stage.

CalSTRS, who previously voiced concerns over governance controls and board oversight, are preparing a letter to send to the company to voice their concerns in an effort to engage the company directly, and likely to illicit support from other stakeholders.

Christopher Ailman, CalSTRS CIO, recently deleted his personal Facebook account, stating that he felt that the company’s “governance is terrible.” Aeisha Mastagni, a portfolio manager in the CalSTRS’ corporate governance unit, issued a written statement in which she commented, “Additionally, we would like to understand what additional steps Facebook is taking to protect this data in order to regain the trust of their users, the public and their shareholders.”

Other asset owners have voiced similar concerns in the past, so it appears CalSTRS will have support for various initiatives to engage Facebook and seek resolutions. These may go beyond data privacy and cybersecurity. Concerns over board oversight, shareholder rights and diversity have been expressed, especially given the company’s growth and evolution.

2018 Proxy Voting Policy Updates

State Street Global Advisors, T. Rowe Price and Goldman Sachs have all updated their 2018 proxy voting policies.

The updated policy documents are available on the Governance Gateway to all CGIC members.  A few of the amendments are noted below.

State Street Global Advisors reiterated their backing of ISG’s six corporate governance principles and expects that issuers comply or explain any deviations via direct engagement. They will evaluate poison pill proposals at Canadian companies on a case-by-case basis, looking at whether it conforms to a “new generation” rights plan. They will rely on engagement to examine Canadian companies’ compensation plans.

T. Rowe Price (which has switched from using Glass Lewis to ISS as their proxy advisor) stated they intend to focus on board diversity during engagement but will hold out (for now) on releasing new voting guidelines based on ethnic and gender board diversity. Their policy is to always vote against shareholders’ right to act by written consent, and “other business” proposals that lack specificity. When analysing pay-for-performance, T. Rowe Price nixed the use of Glass Lewis and Equilar’s outside research for assessing linkage between compensation and companies’ three-, four- and five-year incremental TSR.

GSAM’s updated US proxy voting guidelines included an amendment to vote against or withhold on certain directors or the lead director/chairman when average board tenure exceeds 15 years and there has not been a new nominee over the last five years.

ISG Updates Administrative Structure

The Investor Stewardship Group (ISG) has updated its administrative structure, including establishing three new committees: The Steering Committee, the Governance Committee and the Marketing & Communications Committee. It has also adopted an amendment process.

  • The Steering Committee will serve as the primary policy and decision-making body of the ISG.
  • The Governance Committee will be responsible for providing advice and recommendations to the Steering Committee on governance structure, policies and practices.
  • The Marketing & Communications Committee will be responsible for providing advice to the Steering Committee on all marketing and communications policies and practices.
  • Although ISG does not envision regular framework amendments, as it believes the framework should be evaluated periodically and updated in accordance with best practice governance and stewardship standards, the amendment process will facilitate any modifications.

The ISG framework, which went it to effect at the start of 2018, is attempting to establish a universally-recognized code of conduct in the US for good corporate governance.  The group currently has over 50 US and international institutional investor signatory firms, representing over $22 trillion AUM.

 
Glenn Booraem, Investment Stewardship Officer at Vanguard, stated “Now more than ever, capital markets need organizations like the ISG to establish appropriate governance and stewardship standards for companies and investors alike. This continuing evolution of ISG’s own governance demonstrates our continuing momentum to establish the first ever, broad-based US Governance and Stewardship code. We’re proud of the progress we’ve made with our fellow members and portfolio companies over the past year, and look forward to the continuing evolution of governance and stewardship expectations in the years to come.”

The Value of Board Diversity

The Corporate Governance Intelligence Council has just released its latest research conducted among institutional investors, The Value of Board Diversity (the second part of a study on board diversity and engagement with passive investors).

The full report can be viewed for free here: The Value of Board Diversity

This report is based on 97 in-depth telephone interviews with proxy voters at North American and European institutions (65 and 32, respectively), representing approximately $38 trillion AUM.