In the current environment, the question that corporate boards should be asking with respect to shareholder engagement is no longer if, but how. Engagement with the company’s significant shareholders is becoming the new normal, rather than the exception. Given heightened investor expectations for transparency in governance and oversight, having a well-executed plan for communicating the company’s story and gauging investor sentiment on key issues is critical. It is also increasingly important that the entire board knows what that plan is and what role the directors may play.
“When things go wrong, investors…get one vote, and that’s on directors,” said Stephen Brown, Senior Advisor, KPMG Board Leadership Center. Brown and Lopa Zielinski, currently deputy corporate secretary at HSBC in North America, both former governance leaders for a major institutional investor, joined Faye Wattleton, managing director at Alvarez & Marsal and director on several public and private company boards, for a panel discussion on communications between shareholders and boards.
The discussion, moderated by Susan Angele, also a senior advisor with the KPMG Board Leadership Center, took place during the WomenCorporateDirectors 2017 Global Institute in New York in May. The panel discussed the corporate governance issues most often raised by institutional investors, offered examples of engagement scenarios that boards could face, and provided tips for engagement.
Notably, activist hedge funds are not the only investor demographic driving the need for engagement. “[More traditional institutional investors] are becoming much more active, whether it’s on board composition issues, company performance, or social responsibility issues, they are all over it, and they’re starting to use their votes more and more to drive the change that they want to see,” said Angele. These investors include state and local pension funds, not-for-profit foundations, and university endowments.
Data from Rivel Research Group ranked executive compensation, pay-for-performance criteria, advisory firm recommendations, board qualifications and skills, board diversity, proxy access and corporate social responsibility/sustainability as the issues raised most often by institutional investors.
According to Brown, investors have three main factors on which to evaluate companies and directors: price, personnel, and processes. “Information on the first two is easy to get, but on board processes, investors have very limited information. If your company has good processes, it’s important to explain it to investors to help to demonstrate board competence.”
Wattleton added, “Investors want to know that there is rigor in the [board’s] process—not only on why you got there, but how you got there.” Zielinski emphasized that investors are not interested in a repetition of the company’s public disclosure. “They’re looking for companies to articulate the underlying philosophies behind your story,” she said. “How does this support your strategy? How is this going to be sustainable? They want a deeper conversation.”