Category: Investor Relations

Investors Want to Engage on Sustainability—Are You Prepared?

Published by
Spitler_Chad

Chad Spitler

The rise of sustainability as a governance imperative is inextricably tied to the growing influence of large institutional investors, particularly index funds, and the governance teams within them. Generally speaking, governance-focused asset managers now control more than one-third of the average public company’s shareholder register. Recently, the world’s three largest investors bulked up the staff of their governance teams dedicated to analyzing and meeting with portfolio companies, which included hiring individuals with expertise on environmental and social topics.

The heightened focus on environmental, social, and governance (ESG) analysis and corresponding engagement is heavily influenced by the Principles for Responsible Investment (PRI). The PRI promotes “active ownership” (such as engagement and proxy voting) and “ESG integration” (which is intended to improve investment decision-making by linking the analysis of ESG factors with financial performance). What began in 2006 with 200 asset owners has grown to more than 1,600 global signatories, including investment managers, with more than $60 trillion in assets.

Recently, the PRI announced that it will de-list signatories if they do not show progress in implementing the Principles. Because being a PRI signatory is commonly a requirement for asset managers to win mandates from asset owners, this move may incentivize PRI members to increase the frequency and sophistication of their engagements and add momentum to the quest for ESG data that is comparable across companies and industries.

Market participants are also seeking to understand and quantify the link between ESG and financial value. An increasing number of data providers, consultants, credit rating agencies, and nonprofits are assessing and rating companies on their performance on ESG criteria. Concurrent with that analysis is the emergence of academic and proprietary research which correlates effective ESG oversight with financial value creation, further encouraging investors to understand how companies link sustainability and business strategy.

Investors Take Action
These dynamics are already changing the market. Investor coalitions, including the Commonsense Corporate Governance Principles and Investor Stewardship Group, have been formed to issue guidance and perspectives on governance and sustainability issues. In addition, certain shareholder proposals on environmental and social issues are receiving high levels of support from a growing range of institutional asset managers. Importantly, within the past few months, both BlackRock and State Street Global Advisors have stated that if they do not perceive progress from issuers on sustainability initiatives in their engagement, they will consider voting against the nominating/governance committees of those companies.

Preparing to Engage

Given these trends, it is incumbent on issuers to take steps now to ensure that they are engaging effectively with their investors. Here are four ways to prepare:

  • Establish clear governance of sustainability. Investors want to know that their portfolio companies have effective governance structures in place to manage the development and execution of sustainable strategies. A coordinated program should be built with the following points in mind:
    • Employees across the organization need to be educated, aligned and incentivized toward common sustainability goals;
    • The financial risks and opportunities of sustainability activities need to be assessed for potential return on investment;
    • Metrics and systems need to be established to track progress against sustainability goals; and
    • The board and management should clearly identify who is responsible for sustainability in order to ensure the integration of sustainability considerations into strategic planning and incentives, as appropriate.
  • Identify the material ESG factors for your company. It is critical to identify which ESG issues have the greatest potential to create risks or provide opportunities that may impact the long-term value of your company. Investors are increasingly looking to the Sustainability Accounting Standards Board (SASB), which provides industry-specific guidance on the most potentially material ESG factors in a given industry, and other disclosure standard setters for this information.
  • Tell your story. Companies should be proactive in communicating with investors about sustainability. That means strengthening disclosure of sustainability governance, strategy, goals, and performance in public filings and producing enhanced sustainability reports to demonstrate the financial materiality of ESG topics. Companies will also want to ensure internal subject matter experts are equipped to engage with investors and external rating agencies.
  • Keep your eye on the future. Today, investors frequently compare financial disclosures to material non-financial information contained in documents such as sustainability reports. One trend that is emerging to help ensure these disclosures are complementary is integrated reporting, which combines financial and sustainability disclosure in a single, cohesive document. While still nascent, this practice is intended to provide investors with a better understanding of the link among corporate business strategy, sustainability initiatives, and short- and long-term value creation.

From traditional governance factors like compensation, board composition, and independence, to environmental and social factors like energy efficiency and diversity, sustainability is now integral to every company’s business model. As the market continues to incorporate, value, and reflect the materiality of sustainability into investment strategy and engagement, companies that can effectively tell their sustainability story will be best positioned to succeed with the world’s largest investors.

Chad Spitler is head of  the Sustainability Advisory Practice at CamberView Partners.

Lessons Learned from a Godfather Offer

Published by
Kimberly Simpson

Kimberly Simpson

Is your board ready if the company receives a so-called godfather offer—an offer so strong it cannot be ignored—to purchase the company? Could social conflicts within the company be the undoing of an M&A deal that would benefit shareholders? Panelists at a recent NACD Carolinas Chapter program shared insights on board readiness, lessons learned, and the current state of the M&A market.

The Godfather Offer at Piedmont Natural Gas

According to Tom Skains, former chair and CEO of Piedmont Natural Gas Company, and director of Duke Energy Corp., directors should remember two critical points about the possibility for M&A activity at their companies:

  1. Always be prepared for the unexpected.
  2. Everything is for sale at the right price.

In the case of Piedmont, Skains was aware of industry consolidation and how Piedmont performance compared to peers. However, given the company’s stock price in 2015, he believed Piedmont would be among the last in the industry to be an acquisition target. Nonetheless, after two major companies in the field merged in what became the catalyst for Piedmont, the company was courted by two potential suitors, with offers as much as 50 percent over the company’s trading value. Within two months, Duke Energy purchased Piedmont for $4.9 billion.

How was the deal wrapped so quickly? Skains shared the formula for success.

  • Appoint a deal lead and keep flawless records. Skains was the chief negotiator, and only a small group knew about the potential deal. Skains kept a log of his conversations and reviewed the log at the end of each day with his general counsel.
  • Be transparent with the board. The board was fully informed. In fact, Skains updated the lead independent director each day. Regular executive sessions of the board were held.
  • Deploy good deal hygiene. The official record was the board minutes, and no note taking was permitted. No errant emails or texts were allowed.

The deal also was able to move with greater speed because conflicts were removed from the equation. In fact, to avoid awkward social challenges between the acquiring company and the target, the potential roles of Piedmont leadership were removed as considerations until the deal was done.

Navigating Social Issues in a Merger of Equals

Walter Wilkinson, founder and general partner of Kitty Hawk Capital, and lead independent director for QORVO, emphasized that many deals never get done because of social issues—that is, the future of a merging company’s management team or its directors. He shared his experience as a board chair during a nine-month merger process involving two semiconductor companies.

Social issues arose involving both CEOs, and then to which CFO would take become the CFO for the consolidated company’s new CEO. Also, four board members from each company board ultimately had seats on the consolidated board, but information had to be limited so those who were exiting would not have personal concerns during the negotiations. Eventually the merger was successful, but it is worth noting that social dynamics took time to resolve.

For more guidance on M&A, Wilkinson recommended NACD’s recent article, “Navigating M&A Deals in an Uncertain Environment: Five Questions for Directors.”

M&A: Going Strong

Tim Wielechowski, managing director in the Mergers & Acquisitions Group at Wells Fargo Securities, shared a bright picture of the M&A market:

  • Despite the fact that M&A activity was slightly down in 2016 from a record year in 2015, the M&A market continues to be healthy and robust. In 2017, volume year to date has surpassed last year’s volume for the same time period. Valuations remain high.
  • Private equity participation has been increasing, competing with strategic buyers.
  • It is common for deals to be over-equitized in order to get them done, and 40 percent equity contribution is typical.
  • CEO optimism is strong due to the anticipated pro-business environment.

Chris Gyves, a partner at Womble, Carlyle, Sandridge and Rice, LLP, expertly moderated the panel. NACD Carolinas would like to thank him and the panelists for sharing their experiences with attendees.

Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.

A Well-Tailored Story of Shareholder Activism

Published by
ChicosFASTeamFlorida

From left: Shelley Broader, David Walker, Jan Fields, and Lauren Smith

Chico’s FAS, parent company of the Chico’s, White House Black Market, and Soma brands, made headlines in 2016 when an activist investor dropped its bid for board seats at the company. Chico’s FAS was one of the largest U.S. companies targeted in a 2016 proxy contest. The company’s victory was credited to a number of factors, including the new CEO’s clear vision and the board’s preemptive work on governance.

NACD’s Florida Chapter recently convened a program at the Chico’s FAS headquarters in Fort Myers, hearing insights from NACD Florida Chapter Board member and Chico’s FAS Chair David Walker; Jan Fields, chair of the company’s corporate governance and nominating committee; and Chief Executive Officer and President Shelley Broader.

To set the stage for the discussion, the group shared details about the company’s situation in 2015, prior to hearing from the activist:

  • In the spring of 2015, the company was coming off a weak earnings announcement. The stock was languishing.
  • Fields recognized the situation and began to put together a plan in her new role as head of the company’s corporate governance and nominating committee.
  • Walker became the chair of the Chico’s FAS board.
  • As the prior CEO retired, Broader was identified and slated to join in December of 2015.
  • She quickly assessed and provided the company with a four-pillar strategy that was underpinned by the philosophy that the customer is looking for an excellent experience.

Based on the actions the board took during this period, the panelists shared key steps that every company should consider—not just to fend off activists but, more importantly, to ensure the board and management are looking after all of the company’s shareholders:

  • Ask the question, “What makes us so appealing to an activist?” Think about operations, capital allocation, governance, etc.
  • Know your shareholders. The stock of Chico’s FAS is widely held, so having a strong and engaged investor relations group is a critical element in the company’s success.
  • Identify a team to help point out weaknesses and prepare for challenges. This team could include legal, public relations, proxy advisors, investment banks, etc.
  • Use the newly-formed team to help you look at the company like an activist shareholder might, and be willing to make tough decisions when performance lags. Look at your company against its peers and review what analysts are saying.
  • Utilize a skills and experience matrix to ensure the board has the talent it needs to provide oversight to the company. To avoid directors rating themselves as expert in all areas of the skills matrix, ask each director to rate his or her top three areas of strength. Consider term and age limits. Recruit “rock stars” when you need new board members and make sure they are filling any gaps identified in your matrix.

When the activist challenge arose, the Chico’s FAS board agreed on the key members who would focus on the issue, and management did the same thing, ensuring that all but a small group at the company would continue to devote themselves entirely to advancing the company’s four-pillar strategy and running the day-to-day business during the proxy fight.

For those tasked with meeting personally with an activist, Broader repeatedly stressed the need to actively listen to the activist.  Be sure to understand the activist’s point of view without reacting or prejudging any ideas or suggestions.

Though settling with an activist can sometimes be in the best interest of shareholders, leadership at Chico’s FAS determined that a fight to the proxy stage was warranted. A select group went on a roadshow, visiting significant investors, and creating tailored presentations based on the investor’s particular interests. The group also met with proxy advisory firms by phone.

The meetings proved highly valuable, with these firms ultimately siding with the company. In all of its meetings, the company articulated its strategic plan, introduced its slate of board candidates, and explained in detail why both were better options than those being proposed by the activist.

Lessons learned from Chico’s brush with an activist investor follow.

  • Shareholder relationships are like a vaccine. Maintain robust, ongoing engagement.
  • Be open to change after a vulnerability review. Taking action to address vulnerabilities can result in a stronger defense if one is needed.
  • Be willing to consider settlement but don’t settle if it is not in the company’s best interests.
  • Adopt corporate governance best practices. For example, director independence both by definition and in thinking is critical, and executive pay should be tied to performance. A board must continually hold itself accountable. (It is worth noting that Chico’s FAS is a full board member of NACD.)

What does the future hold for the company? Broader says that interesting times are ahead for retail in general, and innovation and design will be important drivers of her company’s success. While others are taking resources away from brick and mortar stores, Chico’s FAS recognizes the storefront as a key component of its omni-channel approach. No matter the path, the company’s board and management team have now learned a great deal about staying ahead of activists.

NACD Florida would like to thank the team at Chico’s FAS, for hosting the program and the panelists for sharing their experiences with attendees.

Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.