As issuers prepare for a new proxy season, establishing a robust investor engagement strategy can help pave the way to success, writes Michael Vogele, managing director, global advisory group, Alliance Advisors.
“While bringing about change may take months or even years, the communication of this strategy must be sound.”
Now that the dust has settled on the 2023 proxy season, companies are asking themselves what the 2024 season may hold in store for them. Some companies look at N-PX filing data, a Securities and
Exchange Commission (SEC) form that details the proxy voting records of registered funds, to give them insights into investor voting decisions, while investor voting policies are another avenue to aid issuer understanding of voting decisions. While investor policies are publicly available and updated on an annual/bi-annual basis, understanding voting triggers requires a nuanced review.
Starting in September, companies also begin the practice of proactively engaging with their largest shareholders, rather than waiting for investors to contact them with concerns or disclosure requests. The companies taking this initiative are hoping to understand what compensation, governance, environmental and social (E&S) or sustainability risks an investor may perceive and ways to avoid a non-supportive voting decision. Regrettably, not all companies effectively engage with their shareholders. They believe that having calls with the investor portfolio managers is sufficient. Yet, by doing this, they are excluding the ESG, stewardship or responsible investor teams, as they are known in different jurisdictions. It is these entities that end up making the proxy voting decisions and they are the ones that need to be engaged with. Depending on the level of vote support at the annual shareholder meeting, investors and proxy advisors may be expecting a company to make appropriate structural changes. Specifically, any resolution receiving below 80% support from shareholders, be that elections or discharge of the boards, “say on pay” resolutions, auditor ratification, all require a robust corporate response, including clear disclosure on engagement efforts. In addition, should a shareholder resolution receive upwards of 20% support, it would also behoove a company to determine why shareholders supported this resolution by such a wide margin. That being said, many companies unfortunately do not understand what responsiveness looks like for an investor.
As a pertinent example, let us discuss board elections where typical objections are based on shareholder unfriendly governance practices, lack of diversity on the board, or compensation concerns, to name a few reasons. What are companies expected to do with this initial insight? What we would recommend initially is to speak to as many shareholders as are willing to have a conversation, including holders that voted for as well as against the proposal.
Should the pattern emerge from this dialogue that a majority of respondents share these concerns then a company should begin making changes. While bringing about change may take months or even years, the communication of this strategy must be sound. This would entail the publication of robust targets and appropriate timelines for implementation in the appropriate public filing. It is the latter process that one would deem to be responsive.
Similarly, should the company employ a governance practice that investors deem to be shareholder unfriendly, such as maintaining a classified board, then the company should consider sunsetting this practice. As stated above, most investors realize that it may take a company multiple years to resolve this structure, so communicating this effectively is paramount. Addressing compensation concerns Switching to the contentious topic of compensation, every investor has their preferred constructs, and some companies may feel like these principles do not allow for industry-specific considerations. This dilemma highlights the necessity to begin a dialogue with shareholders to determine what they prefer and what non-best practice market norms can be overcome by transparency. An example of this is the publication of financial or non-financial goal data for short-term incentive schemes, specifically the disclosure of threshold, target and max goals. Companies may claim competitive disadvantage by publishing this data, however, should an incentive program exceed target payouts, then an investor may question if the targets were even robust in nature.
This is where concise disclosure is fundamental, listing shareholder feedback and describing consequent changes to compensation structures. Equally, responding to compensation structure concerns requires a comprehensive review and follow-up statement in the necessary fillings. Should there be a historic concern with overpayment for under-performance, then shareholders will expect an appropriate response by implementing risk mitigators, reducing short and/or long-term incentive grant multiples and/or more robust goal setting for long-term incentives. Finally, some companies are still uncertain how to react to shareholder proposals that received support of above 20%. Again, engaging with investors is essential and then responding in an appropriate manner. Never miss the opportunity to state that the company is compiling the necessary information and it will be available at a certain future date.