August 3, 2016
Over the last several years, companies have come under increased scrutiny from shareholders regarding many aspects of corporate governance including executive pay, performance incentives, buybacks, board composition and more. In connection with these trends, the number of shareholder activism campaigns launched grew to approximately 400 in 2015. Though not all investors are activists, all shareholder concerns should be taken seriously as a matter of corporate risk.
Companies have responded in kind. Since 2011, the number of S&P 500 companies disclosing shareholder engagement in their proxy statements has doubled. The figure is even more pronounced looking at the S&P 100—five years ago, just 2% of the S&P 100 disclosed shareholder engagement, which increased to 55% in 2015.
The increased level in shareholder engagement can be attributed to various reasons, not the least of which being executive compensation regulations resulting from Dodd-Frank in 2010, in particular the mandate of an annual shareholder advisory vote on executive compensation—also known as Say on Pay. Coupled with a consistent rise in executive pay, shareholders are now much more attuned to how well compensation is aligned with overall company performance.
Compensation-related topics are only a small piece of what shareholders are examining. Shareholder proposals and activist campaigns can run the gamut of social, environmental, board management, shareholder rights issues and more, all of which require a response from company boards and management. This begs the question: What precisely does shareholder engagement look like?
What is shareholder engagement, and how should companies approach it?
It is often assumed that engaging with shareholders is a once a year event that occurs at the annual meeting. Shareholder engagement meetings are now required on a regular basis, and companies need to be prepared with a thorough understanding of what investors are looking for in terms of executive pay, boardroom diversity and other key governance issues in relation to company performance and shareholder return.
During this fall’s shareholder engagement season—which typically occurs between annual meetings and the end of the calendar year—thousands of public companies will be meeting with multiple investors to discuss a variety of corporate governance issues. As an example, BlackRock alone meets with more than 1,500 companies annually. Proxy advisor Glass Lewis recently said it plans to double the amount of engagement meetings with companies this year. Preparing for these meetings not only takes careful scheduling but also meticulous planning to be sure to address any issues on both sides of the table.
“Shareholder engagement cannot be an ad hoc process, and everyone on your board should know the policy/protocol of engaging with shareholders,” according to a board member speaking at Equilar and Nasdaq’s Board Leadership Forum, having just completed a round of engagement following a failed Say on Pay vote.
On the surface, the concept of addressing every shareholder concern seems straightforward and simple. However, the practice is much more involved. Companies must first take an active interest in shareholder concerns and then address potential changes by assessing the key problems and doing an audit of the current situation, understanding what the change is that shareholders are seeking, and providing a strategic performance improvement plan of key steps that will be taken to remediate the problem. As governance experts recently described in an episode of the Investors Board Performance Review, engagements can look very different from company to company and investor to investor. Therefore, attention to detail in each scenario is critical because there is not a one-size-fits-all response.
Ideally, companies should proactively engage with shareholders following their annual meetings and throughout the year to put themselves on the same page as their shareholders regarding both immediate hot-button issues and long-term strategic plans. This requires companies to have the appropriate, most up-to-date information at their hands throughout the year so they can move forward with effective shareholder engagement.
Equilar BoardEdge now includes the Shareholder Engagement Report, which includes the most up-to-date data on director and executive changes, annual proposal results, CEO and board succession plans for a company and their peers, board policies and executive pay.
By ensuring access to the same data that investors use to evaluate companies throughout the year, boards and management can literally be on the same page with their shareholders during engagement meetings. For more information, visit www.equilar.com/boardedge.html.