Six steps to better shareholder
Corporate secretaries must work with the board to craft engagement
Effective communication is a
challenge in all aspects of life, but in few cases it is more complicated
than between corporate issuers and shareholders. There can be significant
confusion and mistrust in this relationship, and the complicated regulatory
environment certainly doesn’t make things any easier.
Speaking at the western
regional conference of the Society of Corporate Secretaries and Governance
Professionals in September, Chad Norton, vice president of the fund business
management group at Capital Research and Management, explained that
companies often make the mistake of assuming institutional shareholders
don’t like them. In his view, this creates an unnecessarily adversarial tone
between two groups that should have the same goals.
Corporate secretaries must
work to eliminate that adversarial tone and collaborate with the investor
relations team and board of directors to craft a strategy that engages
institutional shareholders like Norton’s company in a way that can be
beneficial to the long-term growth of the firm. Today, at a time when
shareholders have more involvement in forming company policy than ever
before, to not have a shareholder communications strategy invites
unnecessary risk that can negatively impact shareholder value. Here we
present six steps for developing a successful shareholder communications
The first step is
identifying the shareholder base in order to gain an understanding of who
they are and how they feel about particular issues that affect your company
and community. Shareholder ID has long been a controversial topic, as most
investors remain anonymous to the issuer. Andrea Robinson, assistant
secretary and associate general counsel at Amgen, supports shareholder ID
and says it is not something that should be done just in the lead-up to the
annual meeting and then forgotten about.
‘We work with our proxy
solicitors to ID our shareholder base,’ says Robinson. ‘We try to keep on
top of it as much as possible.’ Robinson advocates keeping track of
everything from voting trends on issues to investing trends that show who is
accumulating positions in your company.
‘Doing so will help you
understand what your shareholders’ perspectives might be and what special
concerns they may have,’ she explains. ‘We are trying to keep more in touch
with those elements and the dynamics in our shareholder base, particularly
because we are in such a fast-moving environment.’
Determine who votes the
While identifying and
getting to know your shareholders is very important, determining who it is
that is actually going to be voting shares on items of importance to your
company is perhaps even more vital. Issuers often waste a great deal of time
talking to people who have no true voting authority.
The task of identifying the
correct person who will actually be casting votes come proxy time – it is
often not the analyst or trader – is generally more difficult at larger
institutional investors than at smaller ones.
‘I know it is difficult,’
says Norton. ‘We received hundreds of calls and held meetings over the past
year, many from issuers who have never reached out to us before. It was
clear that issuers found it somewhat difficult because we are a fairly
complex organization and it is not always easy to figure out who is doing
what – especially because we have multiple voting committees.’
Norton suggests establishing
a relationship and a dialogue with one person who is wired in enough to know
what is happening at each institutional investor. ‘You should try and find
one person, hopefully someone you can then leverage and work through
whatever that particular investor’s organizational structure is,’ to
determine who will vote your shares, he says.
Set the right agenda
Once the shareholders have
been identified and the right person within the organization has been
located, the next challenge is figuring out what to talk about.
‘It starts with an
assessment of your corporate governance processes, and you have to be really
honest with yourselves about just what they are and how good they are – or
aren’t,’ says Randall Clark, vice president of corporate relations and
corporate secretary at Sempra Energy. ‘There may be some governance
organizations that don’t give you high marks, and there may be a perfectly
good reason for that.’ It’s a good idea to develop well-supported
counterarguments to poor grades from Glass Lewis or ISS. Governance experts
recommend that issuers be proactive about taking any explanations for poor
governance grades directly to institutional shareholders.
For example, you may be able
to explain why your executive compensation metrics are appropriate for
reasons the proxy regulators might not have taken into account. Also, have a
clear idea of what you want to discuss with institutional investors before
you call them. ‘The one thing you don’t want to do is call up an investor
and say, So, what’s on your mind? That is never well received,’ says Clark.
Norton suggests that issuers
narrow the scope of what they want to discuss on phone calls and have
separate, discrete conversations about specific disclosures and practices.
When it comes to important matters, ‘Send us an email, tell us what you want
to address, give us some lead time,’ he says.
It is also important to
recognize when everything is going well. Sometimes silence is not a bad
thing – if the company has taken an honest look at its governance practices
and does not feel there are any issues, there may be no need to make calls.
‘You could just send us an email saying, We don’t think there are any issues
– do you? We’ll tell you if there is anything that pops up,’ says Norton.
Target investors you need
Issuers can make strategic
errors when they target investors for communication. Try to gain some
insight into the real concerns of shareholders, and then target them with
answers to those concerns. Do not focus on the size of their holdings.
‘My sense is that the larger
institutional investors are not the ones that you are going to have problems
from or need more and more dialogue with,’ says Norton. ‘It is going to be
the smaller groups. You may be reaching out to the top 10, 20 or 25
investors, but I think it is going to be the next 10, 20 or 25 below them
that you should probably be talking to.’ Norton believes smaller companies
are unduly influenced by proxy advisory firm recommendations from ISS and
Many larger investors have
sufficient resources and sophistication to make their own judgments, and may
not follow proxy advisers so closely. ‘One of the first questions we get is
about ISS and its voting policies,’ Norton says.
‘The first thing we have to
do is explain that while we subscribe to their research, we don’t vote
through ISS or Glass Lewis or any other service. We make our own decisions
and vote our own shares. Suddenly the whole tenor of the conversation
changes and we can really get to what the key issues are.’
Seek help from proxy
Issuers should consider
using a good proxy advisory firm to help engage shareholders in various
ways, not just when the company is involved in a proxy campaign. ‘Proxy
firms should be telling you who the key people are at each institutional
shareholder,’ says Clark.
‘They can also analyze your
voting results and figure out who is voting in what ways, who votes with
their proxy adviser and who makes their own choices. This will help to
ensure you are getting in front of the right people (and hopefully at the
right time) not only to deconstruct whatever might have happened during the
last annual meeting, but also to be more proactive in the intervening period
when you are trying to get in front of your shareholder base and find a
moment to talk about all the issues.’
A good proxy firm can give
you a heads-up on how your proposals are doing with shareholders, and give
you some intelligence as to what shareholder moves to expect coming down the
pike. A word of caution about the use of proxy solicitors, however: they are
a valuable part of the process, but they can also cause harm.
‘Far too many times –
especially in the period coming up to an annual meeting – we have found
ourselves getting calls over and over and over again. There is a fine line
between engagement by a solicitor and badgering, and we do feel badgered by
certain solicitors,’ Norton warns.
‘You need to remind your
solicitor that calling during a busy time may not be too effective,’ Norton
continues. ‘When we are in the midst of trying to vote 2,000 shareholder
meetings, we are less receptive to multiple calls from solicitors.’
The final key element is to
make sure that information is captured and that you are in a position to
build on it year after year. Clark suggests creating a historical chronology
of what you have spoken about with each investor that includes a few notes
on each conversation.This will ensure that you don’t show up the next year
with a blank sheet of paper, wasting time going over old ground.
At the end of the day, it is
useful to remember that voting on shareholder proposals is a fact of life
and that the words you use to influence those votes matter. Fostering a
solid working relationship with institutional investors will help create a
situation in which all sides can work together and better outcomes can be
Cross Border Ltd. 1995–2011.