Institutional Investor Engagement: One Size
Does Not Fit All
On Governance is a series of guest blog posts from corporate
governance thought leaders. The series, which is curated by the
Governance Center research team, is meant to serve as a way to
spark discussion on some of the most important corporate
contours of engagement circa 2018
Institutional investor engagement had its origins at Pfizer about 20 years
ago as an experimental, if not quixotic, once-a-year meeting of corporate
governance officers from major institutional investors with senior
management and (horrors!) selected board members. Since then engagement
has become a dominant theme in the corporate governance playbook for both
companies and investors.
Countless articles have been written about, and hours of corporate
governance advisers’ time has been devoted to, the implementation of
engagement policies with institutional investors. What was once a nascent
cottage industry has grown into a full-fledged, world-wide industrial
complex. It is populated by growing and increasingly prominent investor
stewardship and corporate governance teams at domestic and foreign
institutional investors, corporate governance officers and staffs at US
and European public companies, and corporate governance specialists at law
firms, investment banks, proxy solicitors, PR agencies and other more
there are many minor variations on the theme, the majority of corporate
engagement policies emphasize the desirability, if not necessity, of
having one or several board members as key participants (e.g., the lead
director, the chair of the compensation committee and/or the chair of the
Additionally, the company team is usually coached to stay away from the
detailed strategic, financial and performance discussions that predominate
in company dialogues with portfolio managers and equity analysts. Rather,
the emphasis is typically placed on articulation of the board’s broad
strategic vision, board composition and refreshment policies, senior
management succession planning, and the correlation of executive
compensation with stock market performance and achievement of the
company’s basic strategic goals.
short, the company’s engagement script is typically tailored to the
investor stewardship teams at major passive investors (particularly
BlackRock, Vanguard and State Street, which together represent almost 20
percent of the entire equity market) and at those large actively managed
investors that have delegated principal responsibility for proxy voting to
governance professionals rather than to portfolio managers.
investor stewardship teams fit a common pattern:
are quite small in comparison to the huge number of world-wide portfolio
company votes they cast in a year
are principally focused on big picture environmental, social, and
governance (ESG) issues
lack the skill-sets and manpower necessary to deal in depth with company
specific issues of strategy design and implementation, capital
allocation, M&A opportunities, and operational and financial
result is a one-size-fits all quality to ESG centric engagement policies
prescribed by advisors. Unfortunately, the ESG centric engagement paradigm
fails to take into account those actively managed investors that allocate
proxy voting authority in whole or in part to their portfolio managers and
fundamental research teams.
alternative engagement paradigm
view of best-in-class engagement practices has recently been challenged by
publication of engagement policies by two leading actively managed
investors—T. Rowe Price and Alliance Bernstein. The engagement policies of
these two firms makes clear that there is an alternate paradigm for
engagement—one that is not ESG centric, but rather portfolio management
stated engagement philosophies of both T. Rowe Price and Alliance
Bernstein are remarkably similar:
“Engagement, proxy voting activities, and assessment of a broad range of
investment considerations—including environmental, social, and
governance (ESG) issues—are integrated into T. Rowe Price’s investment
processes. Based on our view that these issues are important investment
considerations, our engagement program is driven by our investment
professionals and usually focused on a matter material to the investment
case….The central focus of our engagement program is at the company
level. Generally, we do not identify broad themes and then engage with
multiple companies on the same issue. We believe our company-specific
approach results in the highest impact because it is aligned with our
core investment approach: active management rooted in fundamental
investment analysis (italics in original).”
“As global investors, we are committed to engagement with companies
around the world…we believe that the bulk of the responsibility for deep
company-level active engagement will fall on traditional active equity
managers. A commitment to in-depth, in-house research is essential. It
uniquely positions an active manager to leverage company-specific
research, analyst backgrounds and industry research to drive engagement
with management teams, catalyze improvements and ultimately support
stronger stock returns.”
Portfolio-management-centric engagement has a far different style and
substance than ESG-centric engagement.
Investment professionals not only participate on the front line in
portfolio company engagements, they run the engagement, except to the
extent it involves specific ESG issues where other staff at the investor
has special expertise. As a result, company engagements are research
driven, not generic.
Engagement is an on-going two-way dialogue, not a once or twice a year
“box checking” exercise. In appropriate cases, the portfolio management
team will challenge management and suggest changes in strategy,
operations or financial management. The object in every case is to help
the company improve its business and economic performance with the
avowed goal of increasing the value of the investor’s stake.
Because portfolio management centric engagement is about helping to
improve a company’s performance and value, it is principally a
management, not a board, function. Meeting directors is important only
when issues focus squarely within the board’s purview, not management’s,
and are viewed by the portfolio managers as directly related to the
company’s ability to create shareholder value. No “brownie” points are
awarded for director participation when not relevant to the discussion
at hand. Nor for obvious reasons are portfolio managers anxious to have
advisors participate unless their presence is essential to the dialog.
importantly, portfolio management centric engagement does not focus on
achieving abstract ESG goals for their own sake, but rather on assisting
company management and the board in creating greater shareholder value.
While many portfolio management centric investors care deeply about ESG
issues (and have published voting guidelines detailing their views on
many of them), they view ESG as part of a more holistic investment
analysis. Unlike typical investment stewardship teams, they will raise
ESG issues only when they conclude the issues have a bearing on the
company’s actual performance.
simply, engagement in 2018 should not be a one-size-fits all process.
Different investors care about different issues, and it is highly
desirable to know what those issues are when planning a specific
engagement, rather than learning about them during the engagement.
true for the key index investors—BlackRock, Vanguard and State Street—as
well for other large index investors in the US and internationally. There
are differences among these investors in terms of their priorities and
goals for engagement that should be considered by every portfolio company
undertaking engagement with its key investors.
most certainly also true for actively managed investors which, like T.
Rowe Price and Allied Bernstein, view engagement as part of the
investment/research process which drives their portfolio decisions. Not
all portfolio-management-centric investors will have the same view of a
portfolio company; one may respond well to engagement on an issue whereas
another portfolio management centric investor may not be concerned.
addition, because portfolio management centric engagement focuses on a
company’s fundamentals, it is a uniquely management driven process,
typically requiring participation by senior management and the traditional
investor relations team. The make-up of the engagement team is obviously
quite different from that needed for ESG centric engagements, which has
largely become the province of the company’s governance officers and its
critical point is that engagement is a process of communication. And like
all communication driven endeavors, it must start with the audience and
the reason for the communication. Only when these two essentials are
known, can the message be crafted and the messenger identified.
views presented on the Governance Center Blog are not the official views
of The Conference Board or the Governance Center and are not necessarily
endorsed by all members, sponsors, advisors, contributors, staff members,
or others associated with The Conference Board or the Governance Center.
About the Author: Charles
Charles M. Nathan advises Finsbury global clients on M&A,
financial transactions, governance, board issues and shareholder
matters. Nathan is also a senior fellow at The Conference Board
| More from Charles M. Nathan
2018 The Conference Board Inc.