In today’s proxy landscape, investor engagement is increasingly key to understanding and addressing shareholder voting outcomes and potential areas of vulnerability that activists could exploit. Investor voting decisions have become more nuanced, universal proxy rules have raised the stakes for getting engagement right, and ongoing economic and market uncertainty put the company’s governance and strategy under additional scrutiny.
Board oversight of and, when appropriate, participation in engagement discussions can enhance the success of these efforts. Notably, 93 percent of Fortune 100 companies disclosed information regarding their shareholder engagement programs in this year’s proxy statements, up from 83 percent in 2020, according to proxy disclosure data based on the 69 companies on the 2022 Fortune 100 list that filed proxies as of May 25. Furthermore, 67 percent disclosed that select board members (most often the lead independent director or compensation committee chair) directly participate in those discussions as appropriate, up from 51 percent in 2020.
As management teams get ready for the remainder of the summer and fall engagement seasons, boards should consider practices for making engagement successful, including offering select directors for discussions with investors as appropriate.
Four Ways Boards Can Enable Successful Shareholder Engagement
For more than a decade, the EY Center for Board Matters has been talking with investors annually about what makes for successful engagement. Here are four considerations to help boards in overseeing—and in some cases, participating in—engagement efforts.
Determine engagement objectives and ensure the proxy statement provides an aligned corporate narrative. The current level of company-investor engagement requires many investors to be more targeted in their own engagement approach. Companies requesting to engage need to clearly communicate an objective for the meeting. Embracing the proxy statement as a communication tool can help the company reach a broader audience, as well as lay the foundation for substantive dialogue in investor meetings. Through direct oversight, boards can encourage more purposeful engagement and enhanced disclosures that support engagement objectives.
Ask how management is tailoring engagement discussions and optimizing the opportunity through careful preparation.Spending time to understand the investor’s stewardship priorities and proxy voting policies can help the company know its audience and tailor the discussion accordingly. (See our 2023 proxy season preview for insights into investor engagement themes to provide broader context for understanding specific investor expectations.) Companies and investors should also reach agreement in advance on an agenda that benefits both parties.
Consider more director involvement in investor meetings. When the topic under discussion is directly under the board’s purview (e.g., how the compensation committee is structuring executive pay), investors may gain confidence by hearing directly from a board member and may lose confidence if a director defers to a consultant or management about matters owned by the board. Furthermore, board members may benefit from hearing directly from investors. It may be eye-opening to get an unfiltered, independent perspective—particularly given the insights and perspectives investors may share from their vantage point in assessing the company against its peers and broader leading practices. When investors request to speak with a director, that request should be taken seriously; for some investors, asking to speak with directors can be an escalation tactic when they feel that their concerns are not being heard. Companies should make clear how investor feedback is reported to the board and how it has been considered and addressed.
Understand that the heart of engagement is listening and relationship building.Messaging and tone can be as important as the topic of discussion. Companies should approach the opportunity as a meeting of partners with shared interests. Candor and transparency around challenges the company is facing, what it is learning, and how it is responding can build trust and help investors align their expectations.
A Checklist for Directors Prepping for an Engagement Discussion
Know the company’s objective for the engagement, the meeting agenda, and your role. Will the investor be looking to you to share the board’s governing approach regarding a specific topic or to explain a specific board or committee decision?
Do some homework and ask management for relevant background on the investor with whom you’re speaking. Is this a passive or active investor? Do discussion participants include members of the investors’ governance or stewardship team, a portfolio manager, or both? What topics does the investor prioritize?
Ask management how previous engagement conversations with the investor have gone and what to expect. What questions, tone, conversation style, and level of company-specific knowledge and preparation should you expect from the investor based on the last engagement discussion?
Conduct a practice question-and-answer session with the corporate secretary. What are some expected and unexpected questions where advance rehearsal would help you refine your key messages and gain confidence?
Prepare to actively listen and keep an open mind. How might you gain insight into emerging risks or opportunities for the company, or opportunities to enhance governance practices or communications?
Engagement with key investors can be a significant commitment of time and resources for all involved —and can also provide significant value when successful strategies and preparation are applied. At a minimum, getting a sense-check of how shareholders view the company during an engagement meeting is certainly better than an unexpected vote. Companies should seize the strategic opportunity to listen, learn, share, build relationships, and avoid surprises.
Kris Pederson, NACD.DC, is the EY Americas Center for Board Matters leader.
EY is an NACD partner, providing directors with critical and timely information, and perspectives. EY is a financial supporter of the NACD.
The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
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