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Over the past half-decade, shareholder activism has become a staple of corporate life. Formerly passive institutional investors have developed strong governance profiles and are more assertive than ever. Meanwhile, environmental and social issues have become priority matters for many shareholders. As a result, board members are increasingly being asked to engage directly with shareholders. In the 2018 PWC Annual Corporate Directors Survey, almost half (49 percent) of public company directors stated that a member of their board (other than the CEO) engaged directly with investors in 2018 (up from 42 percent in 2017).
Director engagement allows shareholders to express their concerns while also gaining the board’s perspective on issues such as strategic planning. It also gives the company an opportunity to learn about shareholder priorities, and changes in investor sentiment. It also creates goodwill by demonstrating that the company appreciates and values shareholder input.
However, the board needs to plan engagements carefully, by asking and answering the following eight questions:
When should the meeting take place?
A quieter time, outside of proxy season, is usually a good time to request a meeting. In periods outside the proxy season, engagement can help establish rapport and relationships before an issue arises. Late summer through fall is relative downtime for most institutional investors.
Who should directors be talking to?
It is generally prudent to visit with the largest shareholders, as well as other influential or proactive shareholders such as pension funds.
Shareholders generally want to hear about long-term strategic vision and significant drivers of growth, in addition to relevant environmental, governance and social issues.
What should be on the agenda?
The company should collaborate with shareholders on the attendees and the list of topics to be covered. Shareholders generally want to hear about long-term strategic vision and significant drivers of growth, in addition to relevant environmental, governance and social issues.
When should directors attend?
Director attendance is not necessary at every shareholder meeting. If issues related to compensation, board refreshment/composition, internal controls over financial reporting, capital allocation or strategic alternatives are on the agenda, the relevant director who can speak to these issues should attend. Consideration should also be given to the directors’ communication skills, knowledge and experience addressing investors.
How should directors prepare?
Directors should understand the investors’ holdings, their views on governance issues and whether and how they use proxy advisory firms.
Directors should be well versed in the company’s position on the agenda topics, and should have the necessary information to explain and support that position. Directors should also be reminded about Regulation FD’s prohibitions on the selective disclosure of material non-public information and about legal restrictions on insider trading.
Meetings should never be conducted alone. It is generally appropriate for someone from investor relations to attend any meeting with shareholders, and other participants may include the general counsel or corporate secretary, or the CFO and/or CEO, as appropriate.
How should directors approach the meeting?
Shareholders want to leave the meeting feeling confident that the board understands their concerns, so they must be permitted to express their opinions. Directors should listen with an open mind, and relay the shareholders’ perspectives back to the board.
How should directors follow up the meeting?
Directors should bring shareholders’ concerns to the board for discussion and consideration. In addition, they should work with management to formulate responses to any follow-up requests from shareholders.
How should companies reflect shareholder engagement in proxy disclosures?
Management should use the company’s proxy statement to give a complete picture of the company’s engagement efforts. This may include detailing the number or proportion of shareholders with whom meetings were held; listing the topics discussed during the meetings; and noting the changes the company is considering as a result of these meetings (or the reasons for not implementing suggested changes). Companies should also consider shareholder priorities when drafting proxy disclosure generally. Utilizing the proxy statement to provide insight into areas of investor concern can serve as another way to communicate effectively with shareholders.
Shareholder engagement can prove invaluable to all parties. Shareholders can learn the company’s approach to long-term growth and strategic planning, and gain confidence that the company is open to hearing their suggestions. Directors can better understand shareholder concerns and the driving forces behind their voting decisions. Moreover, engagement can be particularly valuable for the company in establishing a baseline of support from investors should a crisis arise in the future.
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