Engagement is more imperative than ever

Preparing for engagement

Institutional investors are setting higher expectations of boards. The past is not prologue. Even if your company had little to no engagement previously, plan to proactively engage this proxy season. Directors should keep the following considerations in mind as they prepare to engage:

• Understand the environmental and social issues that are material to the company and be prepared to discuss them with shareholders as appropriate. Management and the board should also reassess the efficacy of voluntary disclosures of certain issues. Such discussion may have occurred before but reconsideration is in order.

• Review public statements made by the company since the start of 2020 as well as the company’s public commitments to stakeholders generally. Consider how the company is carrying out those commitments and anticipate and prepare for questions about them from shareholders. Shareholders may use their vote to judge the company—and the board—based on how other stakeholders were treated. Recall that during the early response to COVID-19 in the United States, a large group of investors wrote to their portfolio companies imploring them to offer financial support to a relatively wide group of stakeholders (e.g., full- and part-time employees, contractors, and suppliers).

• Assess whether any changes may be appropriate to address shareholder concerns. These times call for additional introspection and humility. Boards should recognize that, in some cases, a change proposed by a shareholder may be materially beneficial to the enterprise. That is not to suggest that all shareholder proposals or demands should be heeded. If the board determines not to take action on a request, consider how and when the board communicates its views, particularly to employees. While the important nuances involved with the legal suitability of shareholder proposals may be familiar ground to directors and other governance experts, they may not be as well understood by employees when the company seeks no-action relief or recommends a vote against a proposal in the proxy.

• If the company intends to continue with virtual annual meetings, address any issues to ensure that shareholders can meaningfully participate consistent with the manner that would be afforded by an in-person meeting. Investors identified problems such as technical difficulties related to registration and audio, not being permitted to ask questions, insufficient time to ask questions, and management allegedly cherry-picking questions. Simply put, investors do not want to be disenfranchised—intentionally or otherwise.

Going forward, companies and their boards should proactively communicate their journeys to investors and gain their confidence and trust by demonstrating effective management of these critical environmental and social issues.

^{This article originally appeared in the September/October 2020 issue of NACD Directorship magazine.}

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