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Note: The author of the commentary below, Jeffrey D. Morgan of the National Investor Relations Institute (NIRI), is a member of the Program Panel guiding the Forum's "Fair Investor Access" program.


Source: CFO, April 17, 2014 commentary

Governance | April 17, 2014 | | US

Shareholder Engagement Should Be a Two-Way Street

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.

We 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.

It 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 investors.

Jeffrey D. Morgan


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.

In 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 firms.

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: A modernized system would greatly improve engagement with investors and contribute to public confidence in the integrity of the U.S. securities markets.

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 intermediaries.

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 inaccuracies.

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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