Directors of SEC-registered public companies are increasingly taking a more active role in the shareholder engagement process given the evolving corporate governance landscape, including the increasing number of requests for their participation by some of the largest institutional investors. The Conference Board and Rutgers University’s Center for Corporate Law and Governance have recently published a report showing the emerging practices surrounding when and how corporate directors engage with shareholders based on a survey administered in 2018. Because board-shareholder engagements are often undisclosed and private, the results from this survey provide greater insight about how these communications are evolving and may help public company boards prepare for their shareholder engagements going forward.
The respondents to the survey comprise corporate secretaries, general counsel and investor relations officers at 145 public companies spanning three categories: manufacturing, financial services (including banking, insurance and real estate) and non-financial services. Companies are also divided by annual revenues and asset values. The findings represent activities during the 12-month period immediately preceding the time of the survey.
Just a few years ago, there were significantly fewer companies with directors who engaged with shareholders. Shareholder engagement was mostly the responsibility of the CEO, upper-level managers and investor relations personnel and seldom were directors actively involved in the process. The study provides a snapshot of the growing role of the board in the shareholder engagement process. The report attributes this change to three primary factors. First, since companies have been required to hold non-binding shareholder votes on executive compensation (say-on-pay), the number of shareholder proposals that are compensated-related has fallen significantly. Consequently, engagement on compensation matters now primarily occurs during the months preceding the proxy season, rather than the weeks leading up to the annual shareholders meeting. Companies are motivated to have these discussions well in advance of the shareholders annual meeting because the companies are better able to secure investor support of their executive compensation packages before the shareholders vote. Second, activist investors have evolved into a more heterogeneous group, which includes investors such as so-called activist hedge funds as well as investors that primarily focus on long-term shareholder value generation. What’s different is, to effect change, the long-term activist investors demonstrate an openness to employing direct engagement with the executives and directors. Lastly, the report states that the use of environmental, social and governance-related factors has expanded from niche investing strategies (e.g., investing based on principals such as religion, ethics, etc.) to mainstream investing to avert risk and capitalize on opportunities.
Popular engagement topics. The report states that, overall, the most common topics of board-shareholder engagements are the selection of equity-based awards for senior executives (i.e., stock options, performance-based stock, restricted stock, etc.) and board diversity based on gender, race and ethnicity. The nature of the compensation discussion corresponds to the size of the organization—discussions at smaller firms focus on the weight of base salaries and annual bonuses in the compensation mix, whereas discussions at larger companies seem to be more in-depth and concentrate on the “design and workings of incentive plans.”
For the manufacturing segment, one-third of the surveyed companies engage on sustainability reporting. In addition, almost half the respondents in the financial services sector share that they have discussed senior executive incentive plans, “specifically, the choice performance measures, targets, thresholds and maximum payouts. . . .”
Written policies. The study found that formal, written policies concerning board-shareholder engagement are becoming more common among larger firms and “have become more prevalent in the financial sector.” However, among these categories (i.e., larger firms and financial companies), the companies are almost evenly split between those that have formal, written policies and those that do not.
The written policies frequently address: “how investors can solicit an interaction with corporate directors; the allocation of engagement responsibilities among the board, the investor relations function, and other members of the senior management team; who at the board level is expected to lead the engagement process; and the topics on which the engagement is permitted.” According to the report, the most frequent policy concerned the designation of the responsibility for the engagement (i.e., lead independent director, the board chair, the nominating/governance committee, an investor relations officer, etc.). The study implies that these policies are typically not publicly available. Further, while the study does not explain why these policies are becoming more prevalent, reasons could include certain companies wanting to provide “rules of the road” to their outside directors to comply with among other things Regulation Fair Disclosure concerns, as well as the new requirements in the European Union requiring certain asset managers to have certain related policies in place.
Frequency of engagement generally. Typically, the boards of larger companies meet with investors more frequently than smaller ones, due to the greater availability of staff and scalable resources. The financial sector shows the greatest activity. Over 25% of these participants state that their firm engaged more than 10 times within the 12 months preceding the survey, and one-third of this subgroup met up to 25 times during this same time period.
A majority of the companies report that the frequency of board-shareholder engagement has increased over the last three years. The surveyed financial institutions surpassed companies in the other surveyed sectors in initiating a dialogue with investors, with either the board or the company initiating. Boards of large companies are much more proactive in reaching out to their key shareholders.
Time and duration. The most recent board-shareholder engagements are short and many times involve a single exchange. Most engagements still occur outside of the proxy season, when participants have more time.
Engaged shareholder. Across all three sectors surveyed, the type of shareholders who engage the most with directors are passive asset managers. Hedge funds are second across the surveyed business sectors and sizes. By contrast, pension-fund shareholders engage mostly with directors of smaller companies.
Communication methods. According to the report, investors and companies use a full mix of communication methods, including emails, letters, phone calls, video conference calls and in-person meetings. Small-company boards tend to utilize mostly emails.
Engagement challenges.. With regard to investors, the time constraints of their personnel (i.e., stewardship team or the equivalent) are the most cited challenge. Among companies, the most cited impediment is the time constraint of the directors. The report explains that regulatory concerns and management availability are the least cited challenge. The report observes that most companies restrict the discussions to publicly available information despite there being a consensus among legal scholars and practitioners that discussions on selected areas of corporate governance and organizational practices generally do not violate Regulation Fair Disclosure.
Engagement team leadership. Boards of large companies most frequently designate the lead independent director to head the engagement team. In contrast, most small companies utilize either the CEO or board chair.