| April 17, 2014 | CFO.com
Shareholder Engagement Should Be a
The outmoded U.S. proxy voting system imposes
barriers that make it more difficult for companies to engage directly
with their equity investors.
Jeffrey D. Morgan
“Shareholder engagement” is a popular concept — a quick Google search
yields 6.4 million results. It has become a buzzword in the corporate
governance community and is the remedy du jour for a number of
corporate concerns, such as an activist knocking at the door or a
close “say-on-pay” vote.
at the National Investor Relations Institute (NIRI) clearly agree with
this concept. Shareholder engagement is the bread and butter of
investor relations officers (IROs). The best IROs are corporate
athletes who combine skills in finance, communication, marketing, and
securities law compliance in a continuous program of communication
among management, shareholders, securities analysts and other
financial community constituents.
is more important than ever that companies communicate effectively
with shareholders. Changes in corporate governance since the
Dodd-Frank Act mean we’re in a new era where investors have more
influence on corporate behavior. And shareholder activism has seen
tremendous growth. A recent McKinsey & Co. report found that activists
have launched an average of 240 campaigns in each of the past three
years — more than double the number a decade ago. Some of these
activists have well-honed PR machines and can put a company in play
with a strategic news leak or a single tweet. In some cases, boards of
directors have been spooked by activists and have quickly agreed to
concessions, often to the detriment of the company’s long-term
The stakes are high. So it’s only logical that CFOs and IROs want
direct dialogue with investors to ensure their message is received and
all questions are answered. However, the outmoded U.S. proxy voting
system imposes many barriers that make it more difficult for companies
to engage directly with their investors.
The current shareholder voting and communications system is more than
30 years old and needs to be updated and reformed. With more than 75
percent of U.S. public company shares held in “street name,” companies
are forced to go through brokers, banks and other intermediaries to
reach their beneficial owners, many of whom are individual investors.
One serious problem is that most companies don’t know the identities
of all those shareholders. Consider the portfolio manager you’ve never
met before who tells you that the firm has recently taken a
significant position. How do you know if this is true? Do you check
the Securities and Exchange Commission’s Form 13F filings? Good luck.
Under the current rules (adopted in the late 1970s), an institutional
investor can purchase your stock on January 2 and not file the 13F
until May 15. Yes, in 2014, when stock trades are made in fractions of
a second, the timeframe for reporting institutional ownership
positions is still measured in months.
Another barrier to engagement is the SEC’s outmoded Objecting
Beneficial Owner rules, which allow someone who owns a security held
by a financial intermediary to withhold their identification from the
issuer. These rules greatly hinder the ability of companies to
communicate with their retail investors.
Further complicating the situation are the proxy advisory firms that
provide recommendations to shareholders about how to vote on proxy
ballot measures. Instead of reading a carefully crafted proxy
statement, many investors will vote after skimming the proxy advisors’
reports, which have become CliffsNotes for overworked proxy voting
managers. However, these reports often contain inaccurate information,
because the proxy advisors don’t allow most companies to review drafts
for factual inaccuracies. In addition, most of the proxy firms’ vote
recommendations are based on “one-size-fits-all” voting guidelines
that primarily reflect the views of labor investors, public pension
funds and other activists, not mainstream investors.
addition, given their large roster of clients, the two largest
advisory firms have extraordinary influence on the outcome of director
elections, say-on-pay votes and other proxy voting matters. A negative
recommendation from these firms can lead to a 30-percentage-point vote
swing against management. Unlike investors and companies whose proxy
filings are subject to review and sanctions, the SEC provides no
systematic oversight over the policies and research processes of these
NIRI, alone and together with other groups, has called for regulatory
reform of our shareholder communication system and of proxy advisors,
including the ability for companies to know who their shareholders are
in order to better communicate with them. (The SEC is accepting
comments on proxy advisors through its website at: http://www.sec.gov/spotlight/proxy-advisory-services.shtml.) A
modernized system would greatly improve engagement with investors and
contribute to public confidence in the integrity of the U.S.
What specific regulatory reforms are needed in the area of shareholder
communication? Among NIRI’s recommendations are the following:
Improve timeliness of institutional investor equity position reporting.
Accelerate 13F reporting to two days after quarter’s end from the
currently required 45 days. As part of Dodd-Frank, Congress directed
the SEC to consider rules for a similar regime for short position
disclosure every 30 days, so an evaluation of the entire Section 13F
disclosure process follows logically. NIRI also supports shortening
the current 10-day period for activists to disclose when they acquire
more than a 5 percent stake in a company.
Eliminate the SEC’s outdated “objecting beneficial owner” designation
so companies can communicate directly with all of their investors. Public
companies should have access to the contact information for all
beneficial owners and should be permitted to use modern technology to
communicate with them directly, instead of having to go through
Improve regulatory oversight and transparency of proxy advisory firms.
These firms should be subject to the Investment Advisers Act of 1940
and be required to adhere to minimum professional standards that
address conflicts of interest, transparency and accuracy of factual
information; to disclose specific conflicts of interest, including any
business relationships with activists who are supporting a shareholder
proposal; to disclose internal procedures, guidelines, standards,
methodologies and assumptions used in developing voting
recommendations; and to provide all public companies with draft
reports prior to distribution to enable companies to correct factual
With these reforms, we will have an effective proxy and communications
system that is free from conflicts of interest and that allows for
timely, efficient and accurate shareholder communication. Our ability
to communicate directly with shareholders is critical to ensure that
engagement is a two-way street.
Jeffrey Morgan is president and CEO of the National Investor Relations
Institute (NIRI), the professional association of corporate officers
and investor relations consultants who are responsible for investor
communications. Prior to joining NIRI in 2008, Morgan was chief
operating officer of the Futures Industry Association. He has also
served as a senior vice president for the National Association of
Professional Insurance Agents.
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