As the 2015 proxy season gets underway, are you looking for the latest information on the priorities of major institutional investors? Are you interested in benchmarking your board’s approaches to proxy statement disclosures and other critical shareholder communications?
To help you prepare, we’ve bundled five of our most recent and most relevant publications into the NACD Proxy Season Toolkit, a one-stop shop for public company boards.
For more insights on the issues currently facing public company boards and key committees, visit NACD’s Board Leaders’ Briefing Center. And be on the lookout for our exclusive proxy season preview, written by ISS’ Patrick McGurn, in the next issue of NACD Directorship magazine.
Shareholder activism is on the rise. Between January 2010 and September 2013, shareholder actions carried out all over the world surged by 88 percent. Going back to the past 10 years, the number of shareholders with specific activist strategies has doubled. These statistics drive home the need for boards to have healthy investor dialogues year-round—not just when in the throes of proxy season. Looking ahead to 2015, a slate of top influencers in the investor community offered their insights on what the top priorities for boards are going to be. Panelists included: Donna F. Anderson, vice president and corporate governance specialist, T. Rowe Price; Glenn Booraem, principal fund controller, Vanguard; and Stu Dalheim, vice president, shareholder advocacy, Calvert. Peter Gleason, director, Nura Health and managing director and CFO, NACD, moderated the panel.
Using NACD’s Investor Perspectives: Critical Issues Board Focus in 2014 as a framework, Gleason noted that first and foremost: “It’s important for the board to know their investors. It’s too easy to lump them all together—but each investor has their own objectives.“ Engagement strategies are similarly different from one institution to the next. For example, Dalheim explained that at Calvert, their approach is always to engage with constructive outcomes in mind. Furthermore, there are three principles that guide their approach:
Long-term value creation.
Accountability, where management is accountable to the board and the board is accountable to shareholders.
Sustainability, where companies that are sustainable from a financial, environmental, and societal perspectives will be more successful.
In addition, Dalheim explained that the approach to engagement strategy varies depending on the industry. Calvert has analysts that focus on specific sectors and know the governance practices in each sector. In that review process, they see which companies have room to improve. Furthermore, Calvert makes a point of fostering and developing relationships with portfolio companies over time, ensuring that there are open lines of communication. These open lines of communication are fortified by disclosures, which are critical to investor relations.
Anderson emphasized the responsibility of the shareholder on their side of the relationship. From her perspective, shareholders should respond to engagement requests in well-prepared ways, with the proper resources and with a team that is committed to creating a productive engagement experience. On the other side of the table, directors should engage if there has been a request to do so, or that there is a need for those exchanges to take place. With that in mind, she said that there are three key questions an institutional investor should ask before engaging with directors:
Do we have standing to talk to these directors?
Do we have something constructive to offer?
Will this be constructive? And by extension, does the institutional investor think that the board will constructively work with them?
The panel closed by looking ahead at the pressing issues that will present themselves in the coming year. Anderson singled out the issue of bylaws: principles that institutional investors generally believe they can count on, but may not actually be in place for whatever reason. (For example, a company may have revoked its bylaws.) Boards may avoid putting certain bylaws into effect out of fear of activism; however, there needs to be a dialogue about what bylaws boards can change unilaterally.
Booream said that engagement is likely to be triggered by observable components that cause a board to be an outlier—for example, boards whose directors have above-average tenure or boards that lack minority directors. On this score he advised directors to observe the ways in which their boards are outliers, and either own it and explain why their governance practices are in shareholders’ best interests or fix the problems. Shifts in boardroom mindsets will not happen overnight, so it’s important to initiate those conversations as soon as possible.
Dalheim pointed to the issue of director qualifications. He said that boards should have a list of areas of expertise that are needed to effectively oversee the company and then explain how the current board slate illustrates those attributes. In his opinion, this list helps boards identify what’s needed to create growth. Nevertheless, there is currently little disclosure with regard to board evaluations, in terms of either the process or the outcomes. Some companies have an annual statement about board performance–and resulting action steps–which may be a pay that draws increased scrutiny in the coming year.
In March, the National Association of Corporate Directors, KPMG’s Audit Committee Institute, and Sidley Austin co-hosted the latest meeting of the Audit Committee Chair Advisory Council. Delegates were joined by analysts from Moody’s Analytics and Morgan Stanley, as well as leadership from Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB). The group discussed how investors and ratings agencies use financial statements in their assessment of corporate performance, the audit committee’s role in helping to ensure the quality of the company’s financial disclosures, and ongoing FASB and PCAOB projects.
As detailed in the summary of proceedings, the discussion addressed several factors that can diminish the utility of financial disclosures, including high volume as a result of duplication, “boilerplate” disclosures, and the timing of releases. Dialogue yielded the following suggestions for how companies might improve the usefulness of disclosures to the investor community:
Expanded reporting at the business unit, segment, or geography level.“We want to see performance data at a more granular level in order to develop a view of the company’s future growth prospects.”
Providing data that shows trends over multiple years.“Understanding trends over 2, 3, 5 years tells a fuller story. One of my pet peeves is when a company’s MD&A includes comparative data only from the previous year. Investors want more context.”
Using more charts and visuals.“Visuals can deliver a wealth of information using very little real estate in the financial statement.”
Including more forward-looking disclosures.“Investors and rating agencies are trying to assess and project future valuations of the company. I’d be in favor of more safe harbors [in this area] if it would encourage companies to offer more forward-looking information.”
For the full day’s discussion and proposed council action items, click here to read the summary of proceedings.