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Five tips for quality shareholder engagement

Blake Stephenson | August 16, 2016

Corporate governance matters—including the composition and role of board directors, executive compensation, and succession planning—all typically fall in the domain of the corporate secretary. But investors are increasingly taking a more active interest in these issues, and are seeking to communicate directly with corporate boards to wield influence. As direct board engagement trends toward becoming standard practice, it’s crucial that companies are aligned and unified on their corporate strategy and governance policy positions, regardless of whether investors meet the investor relations officer (IRO), the corporate secretary, the management, or the non-executive or outside directors.

Below are five key tips companies should consider to inform their governance and investor relations programs, as the roles of the IRO and the corporate secretary become increasingly inter-dependent.

Top tip #1: Set the strategy. Before meeting with shareholders, understand the strengths and weaknesses of your governance arrangements. This starts with a risk assessment against regulation or codes of practice (as relevant) and an assessment of your board’s skills, knowledge, and experience. Does the board culture or strategy need to change in any way? Are director rotations required to stay within shareholder or regulatory expectations? Make sure that the follow-up actions arising out of the prior year have been completed or justifications for non-completion are understood. If you have a policy on director communications, then review it at the start of the cycle—it’s important to make sure it is still relevant and that all stakeholders understand the company’s expectations.

Top Tip #2: Benchmark your peers. Consider how well your governance arrangements compare with your peers’ and address emerging issues, including those of known activist shareholders and proxy advisors. Market intelligence is critical. Do you understand your top institutional shareholders and the nature of their holdings (are they retail, institutional, activist, etc.)? You will also need to understand the current positions of policy-makers and regulators, the common opinions of lawyers on these matters and proxy advisors’ rating methodologies and views. Consider doing some scenario analysis around what successful activist investor campaigns could do to your board and governance arrangements, and prepare your management team and board of directors thoroughly.

Top Tip #3: Develop the program and execute collectively. If, during your strategy and benchmarking assessments, you identify weaknesses, consider having the board review these to decide whether or not to improve or develop the policies and arrangements in place. Formal policies such as governance guidelines are increasingly commonplace, many of which include disclosure arrangements to avert unnecessary digging by shareholders.

Make it as easy as possible for shareholders to understand your situation—tell your story. Continuous improvement and enhancements should support your ambition to maintain the confidence of your shareholders. If it is determined that no changes are necessary, be clear and transparent about the justification for those decisions with investors—particularly when those justifications pertain to matters of importance to institutional or activist investors. Logistics are critical for seamless execution and should be overseen by someone on the management team. In particular, ensure issues are addressed consistently through management and director collaboration, and that everyone is well-briefed.

Top Tip #4: Maintain a continuous cycle of engagement. Building a strong, communicative relationship with investors is critical, and it will help you to understand their priorities. In turn, this will help to ensure there is a constant and mutual understanding of objectives, and can mitigate the risk of aggressive campaigns against management. Engagement needs to be regarded as a strategic, ongoing relationship and process. Shareholder meetings can be a valuable asset.

To make the most of them, all parties should agree on the agenda in advance and ensure all items are addressed satisfactorily—what’s important to the institutions should be important to you and your directors. Institutional investors are rolling out protocols for meetings to ensure consistency. With a broader company constituency involved in meetings, consider establishing a shareholder engagement committee for the management team to be aligned with those protocols, to collaborate, and to stay in synch with shareholders. And it’s worth nothing that investor relations and governance technology can go a long way to keep track of briefing material and follow-up notes.

Top Tip #5: Don’t forget your stakeholders. Demand for reporting on non-financial performance is growing, including corporate social responsibility and sustainability activities. The developing view is that customers want services from—and employees want to work for—good and ethical corporate citizens. The argument follows that satisfying those demands, together with positive engagement, supports the creation of a sustainable business in the long term. While such reporting is still largely voluntary, you might consider assessing the extent to which these issues matter to your particular shareholders already, and prepare for dialogue with them accordingly – they may not be major investors, but they can be influential to your business objectives. You should also consider how you regularly inform this broader constituency—including customers, employees, suppliers, governments, and the public at large—of your priorities. The trend towards electronic communications will support efforts here, and any direct engagement should typically be conducted by management with the directors playing a limited role; for example, in crisis situations where it might be helpful for the company chair to address the public after an event with widespread consequences.

Concluding thoughts. The shareholder-base of companies is changing and becoming much more vocal about non-financial matters such as corporate governance. Investors are now directing questions directly to the board including the non-executive or outside directors, and they are expecting detailed engagement on a broad series of topics. Many of these non-financial topics are complex and nuanced—the corporate secretary and governance counsel will invariably need to be involved to ensure there is a sufficiently deep knowledge and understanding of the topics before meetings are held with investors. As investor engagement continues to evolve, organizations must adapt to strengthen governance and engagement programs, and equip directors to handle competing interests effectively.

Blake Stephenson is the head of Governance Management & Strategy for NASDAQ.