As companies prepare for their 2020 annual meetings, shareholder engagement and communication should be top of mind for directors. Though primarily the responsibility of management, directors have a critical role to play.
Environmental and social issues continue to dominate the list of topics investors ask boards to address. During the 2019 proxy season, shareholders put forth proposals asking for disclosures of climate-related risk, political lobbying and spending, diversity, gender pay gaps, and human rights, among other topics. The 2019 proxy season also brought a new twist on activism. Employees, particularly in the technology industry, used the shareholder proposal process to press for change at their employers. With that in mind, when thinking about their proxy disclosures, companies and their boards should be mindful that their own employees also read proxies and may be shareholders.
While once considered a nice-to-have element of corporate communications, shareholder engagement has become standard. One-third of more than 300 directors, senior executives, and legal advisors responding to a survey during our June webcast reported more significant board engagement with shareholders over the last two to three years than in the past. And, according to the Edelman Trust Barometer Special Report: Institutional Investors, 95 percent of institutional investors surveyed said that an engaged and effective board of directors is important, 94 percent agreed that they must trust a company’s board before making or recommending an investment, and 92 percent said access to the board is important when considering an investment. The question directors should be asking about engagement is not if they should be doing it, but how.
While the specifics may vary by company, a well-thought-out engagement strategy is key to building long-term relationships with the company’s investors. At a minimum, the engagement plan should:
Now is also the time for boards to think about how the company’s proxy disclosures tell the company’s story. For most companies, the deadline for shareholders to submit proposals is in the fall, before proxy disclosures are drafted. Consider whether the company’s current proxy disclosures clearly and thoughtfully articulate the company’s views on issues of interest to shareholders, such as long-term value creation; strategy; oversight of risk; and environmental, social, and governance issues, such as culture, diversity, and human capital management. Among the 100 largest US public companies, 86 percent included a proxy statement summary, 87 percent included an executive compensation highlights section, and 83 percent included a corporate governance highlights section, according to Shearman & Sterling’s 2018 Corporate Governance and Executive Compensation Survey.
Outside of direct engagement, investors are tasked with assessing the value and robustness of the board based on the information the company makes available to them—primarily in the form of a board skills matrix contained within the proxy. Some companies have enhanced their proxies with additional visuals and disclosure in an effort to help better inform shareholders about how the board carries out its oversight duties, how the skills and experience of the directors contribute to the board’s effectiveness and align with the company’s strategy, and how board and director self-evaluations are conducted.
In addition, companies may opt to include voluntary disclosure in their proxies to highlight the company’s efforts on shareholder engagement given heightened investor interest. According to the Shearman & Sterling report, 82 percent of the 100 largest US companies disclosed shareholder engagement in their 2018 proxy statements.
This article was originally published in the September/October 2019 issue of NACD Directorship magazine.