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January 10, 2011 |
Conducting Effective Shareholder and
Third-Party Outreach Programs
Now more than ever, public companies in the United States are faced
with increasing shareholder activism and new and challenging legislative and
regulatory requirements, as well as heightened and ongoing public scrutiny.
At such a time, it is critical that company management and, depending on the
situation, boards reach out year-round to their shareholders to understand
and evaluate their concerns. It is also imperative to remain in contact with
corporate governance rating and advisory firms that issue proxy season
reports, such as ISS and Glass Lewis, and other third party opinion-makers,
such as the Council of Institutional Investors (CII). For these reasons,
companies are well advised to develop or enhance cohesive, efficient and
effective outreach program to these constituencies.
What is the First Step in an Effective Outreach Program?
The first step in any effective outreach program is a thorough analysis of a
company’s shareholder base. Companies should work with an experienced proxy
solicitor to prepare a list of their top 30-100 institutional investors,
depending on the company’s size and concentration of shareholder ownership.
A proxy solicitor should be able to provide not only the names of a
company’s top institutional investors, but also the proxy voting contacts at
each firm, to which proxy advisory services they subscribe and whether they
follow voting guidelines developed by a proxy advisory firm or internally at
their own firm. In the case of significant investors with their own internal
voting guidelines, companies should additionally obtain specific advice on
the investors’ voting guidelines and any likely proposals and
recommendations that these investors are likely to propose to companies
whose stock they hold.
This type of analysis is also valuable in creating vote projections for
companies, so that they can anticipate and plan for the percentage of
shareholder support that both management- and shareholder-sponsored
proposals will attain and any other activism that may be expected from
different institutional investors. Highly accurate vote projections rely on
not only analyses of institutional investor voting policies and voting
decisions and activism compiled over decades, but also the effects of market
influences, such as stock prices and performance (current and historical),
board composition, and corporate governance records and trends.
How is an Effective Outreach Program Developed and Refined?
Companies generally begin to develop strategies to reach out to the proxy
voting/governance contacts at their institutional shareholders who are
likely to be receptive to their engagement efforts. In cases where their
shareholders rely more on their portfolio managers for voting decisions, a
company’s investor relations team may be the primary executive(s) to reach
out to these shareholders.
Companies can work with their proxy solicitors to discuss which times of
year are most effective for this outreach, which company executives to
consider involving in these efforts, how best to explain a company’s
particular business strategy and governance practices, what are the “hot
buttons” for certain shareholders, and possible responses to difficult
questions that may be posed by these institutions. These "hot buttons" and
difficult questions often arise when a company's practices diverge from
investor or proxy advisory firm voting guidelines. Companies should be
prepared to explain why such divergence is appropriate for them at that
particular time.
Proxy solicitors can also discuss with companies when it may be appropriate
to bring senior members of management and board members into discussions
with their institutional investors and how to begin or continue to educate
their senior management and board about the possibility of such situations
in the future. In any event, members of management who conduct any form of
engagement are well advised to emphasize that a company's board is very
interested in what their shareholders are thinking and that shareholder
views will be shared and discussed with the most senior members of
management and the board.
After receiving feedback from engagement with investors and proxy advisory
firms, companies often decide to go beyond what is legally required in their
proxy statement, to address, head-on, specific concerns that have been
raised. This additional disclosure can later be useful to better inform
voting recommendations and decisions during the actual proxy solicitation
period.
Should Companies Engage Proponents of Shareholder Resolutions
Submitted to Them?
Engaging a shareholder proponent can be a valuable step for a company, even
if the company eventually concludes that it is not appropriate for it to
take the requested shareholder action.
Before initiating such engagement, a company should be aware of the
following factors:
- Who is the Proponent making the proposal, their
history, their other interests in the company and its industry and the
success of the proponent and their proposals with other companies,
- What is the Proposal, whether it has a high
likelihood of success or failure and how much time and expense the company
is willing to spend to defeat the proposal, and
- What is the Likelihood of Success for the proposal, based on
the earlier-mentioned analysis of the company’s shareholder base, the
various positions of its shareholders on the issues raised by the proposal
and the likelihood of how its shareholders would vote on the proposal.
Once a company understands these factors, it is
often the case that the company, through discussion with the shareholder
proponent, may succeed in getting the shareholder to withdraw its proposal.
Often times, many shareholder proponents are not looking to be combative,
but sincerely want to negotiate or simply communicate with a company. Some
proponents use the proposal process to catch a company’s attention and to
discuss an entirely different issue. Usually, these other objectives would
not succeed as a shareholder proposal and, therefore, the proponent may
withdraw its submitted proposal if it is able to discuss its other agenda
with the company.
Shareholder engagement may also open the way for a company to see how it
might modify its plans further to satisfy the proponent (and perhaps even
learn something from a proponent’s expertise in the particular area),
without compromising certain principles that its management and board
believe are important for a company to maintain. Engagement may also buy the
company some time to study further the subject matter of the proposal with
its management and board. In some cases, the proponent may agree to withdraw
the proposal for the current year while continuing the engagement and seeing
what action the company takes in the coming year.
Shareholder engagement – whether at the management or board level – also
enables a company to explain later to the proxy advisory firms (such as ISS
and Glass Lewis) and its other shareholders that it openly and honestly
discussed the issue with the proponent, but that it could not come to a
mutually acceptable solution without compromising important company
principles. This can be particularly valuable to a company if it later talks
to the proxy advisory firms and solicits its other shareholders to vote
against the proponent’s proposal.
How Should Companies Engage during the Height of the Proxy Season?
In the midst of a proxy solicitation campaign, a company can work
closely with its proxy solicitor to reach out to the proxy advisory firms
and its shareholders to explain its positions. This can range from a call
from one or more members of management to an in-person meeting with both
management and independent directors present. Depending on a company’s
shareholder base, the shareholder outreach may vary from reaching out to
only a few large institutional shareholders or to launching a full-scale
call center campaign to a large group of the company’s retail shareholders.
Written communications can be sent by email or physically delivered,
depending on the type of shareholder, the issues and the projected closeness
of the voting results.
In the case of the proxy advisory firms and the company’s institutional
shareholders, a company’s proxy solicitor can be very helpful in identifying
the key voting contacts and helping to craft messaging (as noted above), as
well as in setting up the necessary calls and meetings. While a proxy
solicitor can have the discussions on behalf of a company, it is generally
much more effective for the company when it has one or more of its own
representatives conduct those discussions directly. Depending on the
circumstances, a proxy solicitor may also suggest further steps such as
taking part in open webcasts sponsored by ISS or Glass Lewis, sending out
additional solicitation materials to its shareholders, and/or launching a
simultaneous PR campaign in the mainstream press.
Companies should remember that if their solicitation communications touch
anything that is not covered by their proxy statements, they generally will
file those communications as additional solicitation materials with the
Securities and Exchange Commission.
How Should Companies Respond to Investor Outreach to Them?
Companies should almost always respond relatively promptly and respectfully
to any outreach by an investor or an association of investors, such as CII.
In some cases, companies may be targeted by an investor as part of a
letter-writing campaign to hundreds of companies on a particular issue, such
as majority voting for directors. In the case of CII, companies can expect
to receive letters asking their boards to explain their positions, if they
have had shareholder proposals receive majority shareholder support or
directors receive a majority of withhold/against votes. As in the case of
responding to shareholder proposals, it is very important to respond in a
timely and respectful manner, even if a company ultimately ends up agreeing
to disagree with the investor or association, after a thoughtful independent
board or committee analysis of the issues raised.
Some companies take the opportunity of investor outreach on a particular
issue to engage the investor more broadly on company governance practices.
Often an informal call in response to such outreach is a useful way to
initiate that broader discussion.
What are the Current and Expected Trends in Shareholder
Engagement?
Over the past few years, companies and investors have been
experimenting with different types of engagement, which can be expected to
continue. Although initial discussions generally take place on a
confidential basis, companies and institutional investors have tried such
things as:
- holding larger investor meetings with company
management and some independent directors
- having investors meetings alone with a company’s
chairman and/or one or more independent directors
- having a group of companies meet with a group of
investors on common issues of concern or interest
- expressing investor concerns through a company’s
advisers by, e.g., using surveys
- providing an opportunity for investors to provide
feedback on a specific part of a company's website
- posting thoughtful interviews of independent directors
on a company's website, to give investors a better understanding of how
the board understands and approaches various issues
The new
proxy disclosure rules, as well as the new governance reforms under the
Dodd-Frank Wall Street Reform and Consumer Protection Act, will likely
result in increased and new forms of company-shareholder engagement. With
Say-on-Pay votes potentially annually for most public companies and the
possibility of proxy access nominees in future proxy seasons, investors can
be expected to use these new disclosures and tools to encourage further
engagement with companies about issues that concern them.
Conclusion.
Pro-active companies should be alert to opportunities to engage their
significant investors both during and outside of their proxy seasons. Each
opportunity may present unique challenges. However, by embracing the
engagement process and dialogue, companies should find that they are better
prepared to successfully meet these challenges for the long-term benefit of
both the company and all of its shareholders.
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