FOCUS REPORT

Corporate Competition for Investor Support

Looking at shareholder meeting communications from a corporate manager’s perspective, the big challenge is competing for capital and voting support from investors who need significantly more information. As reported in last week's Review, investors will be making decisions about a greatly increased number of non-routine voting issues, including proposals generated by the Dodd-Frank Act’s provisions for “Say on Pay” and proxy access, and will also be considering all voting and capital allocation decisions more carefully in the context of heightened concerns about risk control and accountability.

What we learned from investors has been consistent:[1]

• They want to get the additional information they need from direct communications with a company’s management, not from proxy advisors or other research services and not from more detailed disclosure filings.

• They want to be able to communicate with different types of executives and board members so they can get different perspectives on various subjects, such as a company’s long-term strategy rather than just short-term quarterly performance.

• They want the communications to be timed for developing comfortable understanding in advance of decision requirements.

Now, what we’ve learned from corporate managers is that many of them want exactly the same things. And with current communications technologies, they can actually deliver what everyone wants.

More direct communications

Many leading companies have been developing processes for more direct communications with their investors, as seen in nearly all of our reviews of this year’s annual meetings, and every corporate manager that we asked reported that they expect to do more. “We surely support the idea of disintermediation between companies and investors when it comes to useful discussion and sharing of information,” says Cary Klafter,[2] vice president of legal and corporate affairs at Intel.

Direct communication can take many forms, from meetings to letters to conference calls, and can also involve various executives as well as board members. Just as the past decade has seen increased use of analyst days, quarterly calls, road shows, management meetings and similar direct communications in the competition for capital, similar processes are evolving in the competition for voting support. Investors are clearly receptive to these initiatives. Hye-Won Choi,[3] senior vice president of corporate governance at TIAA-CREF and co-chair of the SEC Investor Advisory Committee, says “I think there will be increased dialogues. Most of the conversations will occur between shareholders and management but there are issues that are appropriate for direct communication between directors and shareholders.” She adds, “Shareholders and companies need to work together to establish practices to facilitate such conversations and overcome any potential obstacles.”

Some leading companies are making efforts to establish direct communication before any high-impact voting issues emerge. To engage its 2 million shareholders, Prudential Financial took a number of steps including offering voting incentives – a choice between a “green” bag or a tree planted in the shareholder’s honor. The result: 23% more shares were voted in 2010 than in 2009. “We were able to engage our shareholders,” says Peggy Foran,[4] Prudential’s vice president, secretary and corporate governance officer. “People who would not have looked at the material did in order to vote.” This is important, says Foran. “We are competing for people’s time.”

Using current technology, companies can reach a significantly larger number of investors than ever by lowering the costs for both host and participant – important equally to “retail” and professional investors who can’t justify travel time. The widespread use of webcasts for quarterly performance conferences, for example, has shown how improved access can expand direct investor participation. Not only have webcasts become standard practice for quarterly conferences, but they are also being used now for shareholder meetings by about a third of respondents to two recent surveys of investor relations officers and corporate secretaries.

And service providers are starting to offer “virtual” annual meeting technologies that enable companies to reach more shareholders. Broadridge Financial’s vice president responsible for “virtual” meeting services, Cathy Conlon,[5] says the company offers two products that can help companies expand their reach electronically: a platform for running an annual meeting with live electronic voting participation, and a web site message board enabling shareholders to vote, ask questions and take surveys before and after the meeting. “Those are our two solutions to what we look at as the shifting need to take advantage of technology to enhance shareholder communication,” says Conlon.

Computershare, too, has recently announced the initiation of “virtual meeting” services that allow its transfer agent clients to offer shareholders live participation with voting, polls, and asking questions online. “In this day and age companies need to engage with their owners much more,” says Simon Bryan, the managing director responsible for Computershare’s North American meeting technology division.

Better timing

Corporate managers and investors alike want information delivered when it matters – before the investors have to vote. The question-and-answer session that is conventionally conducted after the conclusion of the official part of an annual meeting, for example, would be a lot more useful if it took place at a time when both managers and investors could make good use of it – managers could better understand the investors' decision-making criteria so they can effectively respond to them, and investors would be able to consider those more focused responses in their voting decisions.

The idea of “pre-meeting meetings,” for example, suggested during the Forum’s open meeting by an activist investor, Tracey Rembert of Pax World Management, has generated positive interest from corporate managers as well as from a wide range of investors. An old, established practice for do-or-die voting issues such as control contests, a Rembert pre-meeting conducted with electronic communications could become a cost-justified process for a wider range of high-impact voting issues such as stock plan approvals.

The availability of electronic tools can actually make it practical for companies to engage a broad range of shareholders in pre-meeting communications even for routine issues, as well as for subjects that have not yet become voting issues. Several of the companies observed in past Review articles used web-based message boards that allow shareholders to ask questions or take surveys so that managers could learn about their investors’ interests before the meeting. The Forum's independent investor surveys have also been used by companies seeking quantitative research to develop early understandings of investor interests and decision-making criteria.

Many corporate managers favor engaging in communications throughout the year, not only before an annual meeting, for the same reason that many investors favor it: to avoid more pressured, time-sensitive proxy season communications and, perhaps more importantly, to build sound relationships with long-term investors. Best Buy, a company that advocates a “Connected World” for its investors and for users of its communications products alike, has been among the leaders in developing policies and practices for continuous communication with investors. “I think there will be more communication,” says Lisa Lentini, the company’s senior corporate counsel, “but communication need not be limited to proxy season. It needs to be a year-round, open-door policy.”

Listening

Listening to investors, a/k/a intelligence, is becoming an increasing focus of corporate managers, especially as board members become more involved in the communication process.

(Just ask any corporate director if she would rather be briefed on what interests shareholders before attending the annual meeting, or just wait and see what they ask her at the meeting.)

So important is careful listening, it should be considered a top priority of investor relations, says Jeff Morgan, CEO of the National Investor Relations Institute (“NIRI”). “We often think of IR as the communicators outward of the company,” he says. “They are also listeners. They should be taking that back to the company and spreading the information that ultimately helps the company understand what are the issues and how do we handle them.”

Morgan also emphasizes the importance of briefing directors. “A good practice for IR is to have a report in the board packet, and at least once a year have a meeting and discussion with the board,” he says.”

Directors are increasingly interested in learning about investor views and are often taking the initiative themselves to listen, according to Prudential’s Foran. “I think boards are realizing there will be more engagement and are figuring out what is appropriate for what group,” she says, emphasizing that there are different ways to engage and communicate with different shareholders. “I don’t think there is one size that fits all. Not all shareholders think alike.”