February 18, 2020
In anticipation of the upcoming proxy season, public companies will review their current governance practices and look to leverage their annual proxy as a vehicle for greater shareholder transparency. Equilar recently hosted a webinar with John Beckman, Partner, and Tiffany Posil, Counsel at Hogan Lovells, as well as DFIN’s Director of Corporate Governance Solutions Ron Schneider, to discuss the most pressing governance issues of 2020.
Much of the discussion centered on how companies can engage with shareholders and address their concerns surrounding environmental, social and governance (ESG) policies, while leveraging the annual proxy to increase the scope of their policy disclosures. All three panelists emphasized the need for companies to be proactive in their approach to engaging with all types of concerned parties, whether they are index fund managers, activist investors or proxy advisors that publish voting recommendations. Being proactive should certainly include making ESG and board policies explicit in the annual proxy, but should extend to other forms of shareholder engagement, including investor ‘roadshows’ that take place between proxy seasons. In the case of unexpected CEO departures, being proactive about creating a succession plan can save the credibility of a company that would otherwise be left floundering to prove to shareholders that they know what to do next.
Leveraging Proxy Disclosures
At a certain point, the information that shareholders have on director behavior and performance is going to be limited. Boards are supposed to make judgments on high-level company issues that often involve confidential information that is not available to the public. Board members can operate confidentially to assess executive performance, without fearing that everything they say behind closed doors is going to be made public as soon as their meeting ends. However, this presents a challenge to shareholders, who have a vested interest in the performance of boards that govern the companies they invest in. For that reason, comprehensive board policies should absolutely be disclosed in the annual proxy.
“[Investors] can’t see into the boardroom to evaluate how individual directors or the board is performing, so investors look to structural and governance best practices to judge board governance,” explained Beckman. This is the reason why you’ll see increased disclosure of things like board self-assessment evaluations in proxy statements.”
Proactively Managing Shareholder Activism
Publishing comprehensive governance policies in the annual proxy is a key step for companies to engage with activist shareholder concerns. However, with new topics becoming hot-button issues in the corporate governance space, it can often seem like a year is too long of a wait for companies to address the most up-to-date expectations of activist shareholders.
“As history has shown, no company is forever immune from activism, whether its size or regulated industry or strong performance… the best advice is don’t wait,” stated Schneider. “Don’t respond reactively when an activist surfaces, it may be too late, they’ve already been talking to a lot of your index investors.”
Schneider’s insight highlights the daunting task that companies face in engaging with increasingly vocal activist shareholders, who have a significant impact on the policies of the more powerful institutional investors and proxy advisors. By the time an activist is bringing you a problem they have, it is probably too late for a company to stay ahead of the discussion.
Posil shared sound advice on how engaging with proxy advisors will mitigate some of the harm of an activist dispute. “Most companies appreciate that large shareholders tend to rely heavily on proxy advisory firm reports for voting advice, and companies should be aware that they can proactively engage with proxy advisory firms,” explained Posil. “When doing so, it is important to ask them what they care about, perhaps by initiating conversations about the proxy advisory firm’s policies, particularly for those policies that the firms evaluate on a case by case basis."
Board Succession: Having a Plan Plays Off
The discussion concluded by examining how boards can best be prepared for executive departures, especially in cases where a high profile CEO departs unexpectedly. “To mitigate risk and avoid broader fallout, the best thing a board can do is really to have a robust succession planning at both the board and committee level,” said Posil. “That includes planning for an unexpected situation… whether that is next week, next year, or in two years.”
Posil emphasized that succession planning should include a prepared approach to addressing media and shareholder concerns about unexpected CEO succession, the same way a company should have a policy in place to deal with a cyber-attack or a conflict with an activist shareholder. This policy should be addressed in the proxy, as in the case of Nielson (NLSN), who disclosed a succession plan in their annual proxy, and described how they put their policy into action when their CEO departed in 2018. Nielson chairman took on the interim CEO role in July, and the company had a new permanent replacement by December.
Connor Doyle, Research Analyst at Equilar, authored this post. Please Contact Amit Batish, Content Manager, at email@example.com for more information on Equilar research and data analysis.
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