What every IRO should know about engaging large institutional holders

Aug 16, 2022

Shareholder engagement is a priority for IROs. Engagement with key shareholders provides the opportunity to communicate with these investors about the company’s long-term strategy and to develop and maintain relationships with this important stakeholder group. The critical need for engagement has resulted from the lasting effects of the pandemic and the resulting economic issues, including inflation spikes and market volatility and the increased focus on ESG issues.

If anything speaks to the need to engage it is the rise in shareholder proposals in the last proxy season and renewed efforts of shareholder activists. Engagement puts the company in a better position if an activist comes calling or if it receives a shareholder proposal for the next annual meeting. The necessity of building and maintaining a relationship with these important investors particularly during these unpredictable times can’t be over-emphasized.     

Shareholder engagement is a two-part process. The first part is run by the Investors Relations Group with the buy side analysts. This includes the conversations with analysts during the quarterly earnings calls and at investor conferences. This part of the engagement process is the integral to IR activities so there is no need to elaborate on this aspect further here.

The other part of the engagement process includes the interactions between the Corporate Secretary/ Legal Group and the governance group at the large funds that own stock in the public company and possess the ability to vote a significant portion of the shares at the company’s annual meeting of stockholders. This shareholder group will likely include Fidelity, BlackRock, State Street, T. Rowe and Vanguard. The company’s conversations with the governance group of these funds can include certain key board members, as well as members of the IR team.

Why engage?

Conversations between key shareholders are beneficial for both the company and investors. This engagement provides the opportunity for the board members and the IR team to hear directly from the group at these funds that vote the shares. This group has the ability to determine the outcome of director elections, as well as the approval of key management proposals or activist asks. This type of engagement can provide investor insights on key issues like climate change, diversity and inclusion and governance. It also provides the company the ability to provide information to investors regarding the company’s vision and long-term strategy and to answer investor questions about these important matters. The dialogue regarding these issues is a powerful tool to enhance understanding and forge relations between the company and the fund.

Developing relationships with key investors and providing insight on the company’s strategy is critical if the company becomes subject to an activist shareholder attack or a shareholder proposal. When in an activist situation or to defeat a shareholder proposal, the company will need to rely on these shareholders for support.

In order to make these engagement discussions as effective and successful as possible, it is important to take note of the following before engaging with each fund.

Understand the issues

Before having a conversation with key investors, it is important to know what issues or topics are important or ‘hot topics’ for these investors and how the company stacks up. All large funds put out policy statements regarding where they stand on important issues so it is important to understand their point of view on these matters.

Directors generally don’t get involved in the preparation of the company’s proxy statement but it provides a wealth of information for investors. Directors and others participating in these meetings need to be briefed on proxy disclosures, as well as issues and other matters important to these investors, as well as investor positions on key issues impacting the company.

It is also important to determine whether the fund makes voting decisions based on recommendations from proxy advisory firms like ISS and Glass Lewis or whether they consider the proxy advisor firm recommendations and make their own decisions on proposals. This fact is often crucial in the engagement decision as it will determine the focus of the conversation. This information can typically be provided by the company’s proxy solicitor.

Prepare to engage

The proxy statement was historically viewed primarily as a disclosure document required to be provided to shareholders to comply with SEC requirements. Over the years, the proxy statement has become the primary means of communicating with shareholders. If drafted effectively, this document can provide the necessary transparency regarding the company, the board oversight and management that investors seek. The IR team members participating in these discussions should know what is in the proxy statement regarding key issues to be discussed. These areas can include: executive compensation, ESG matters, governance and diversity and inclusion matters.

The proxy statement also provides the opportunity to showcase what the company has done and is doing in critical areas like ESG and long-term strategy. This is important given recent SEC proposed rules related to governance disclosures related to climate change initiatives and the board’s role. The information in the proxy statement regarding the company and the company’s key initiatives, compensation program and governance, as well as information on the company or IR website related to these matters, are important to review prior to the engagement as this information generally forms the starting point for discussions.

It is helpful to carefully select the engagement team who will attend this meeting and the agenda topics generally dictate who should attend. Attendees can be members of the company’s corporate secretary group, the IRO or members of the IR team and the chair of the compensation committee or the lead independent director. Participation by the director of ESG or the committee chair responsible for ESG and sustainability initiatives may be important as well.

These meetings provide the opportunity for the company to gather important insights on the proxy contents and other disclosures that investors would like to see that can be included on the IR website. Frequently, funds will indicate disclosures or enhancements to disclosure that can be easily reported on by the IR team or included in its proxy materials for the next year so it helps to have them memorialized in writing. They can also talk about how disclosures can be improved or other areas they want to hear more about. It is helpful to have someone documenting what is said so that the speakers can focus their attention on the conversation and the points made are clearly recorded. These insights can be extremely helpful when drafting the proxy disclosure or when the IRO is speaking with PMs regarding company initiatives in the future.

A quick run through a list of questions and who will answer them is always a helpful exercise and it never hurts to set out ahead of time who is going to respond to what questions during the meeting so that everyone can be prepared as possible. It is also ok to say you will get back to the shareholder if there is a question that the engagement team is not prepared to answer.

Engagement timing

For most companies, the interest in engagement is critical during the month before the annual meeting of shareholders and after the proxy materials are mailed to shareholders. The most effective engagement occurs after the proxy season when institutional investors have time to have a relaxed conversation with companies. This also signals that the company cares about what its investors think enough to engage with them when there is no pending solicitation of votes.

These investors note when proxy season comes along which companies took the time to have a conversation outside the proxy season. This can be very helpful to a company wishing to engage during proxy season regarding an important proposal on the ballot.

Simple is best

The focus of the conversation should be on a few key themes or points that you want to make sure you get across during the call. It is critical that companies approach the engagement opportunity with an open mind and with an eye toward using this opportunity to educate the investor on the perspective of the company on important issues confronting the company like ESG or greenhouse gas emissions. A company will only get 30 minutes with the fund so it is important to be strategic about the use of time. In approaching engagement, remember to keep it simple.

Engagement is an ongoing process

Engagement is centered around the development of strong relationships with their critical stakeholders and providing them with insights into the company’s strategy and long-term plans, as much as it is designed to solicit proxies. Each company’s approach to engagement with shareholders should reflect a company’s unique characteristics and culture, as well as the issues and topics that will be discussed at the engagement meetings. Engagement is a process that takes time to perfect.

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