Board-Shareholder Engagement Practices
Posted by Matteo Tonello (The Conference
Board, Inc.) and Matteo Gatti (Rutgers Law School), on Monday,
December 30, 2019
engagement is increasingly being added to the job description of the corporate
director. The phenomenon is the natural evolution of the changes to the
corporate governance landscape that have occurred during the last two decades.
First, there is the expansion of the board’s oversight responsibilities that
resulted from the Sarbanes-Oxley and Dodd-Frank legislations. Second, there is
the progress made by the shareholder rights movement, with investors’ claim for
a more direct involvement in business decision-making.
analyzes and documents emerging practices in the role of the board of directors
in the corporate-shareholder engagement process. It is based on a 2018 survey of
corporate secretaries, general counsel and investor relations officers at
SEC-registered public companies conducted by The Conference Board and Rutgers
University’s Center for Corporate Law and Governance (CCLG).
It has long been
customary for public companies to interact with their shareholders, on earnings
calls and at annual general meetings (AGMs). These traditional forums of
communications are periodically convened to apprise investors of financial
results, material organizational decisions, and key strategic choices. However,
they seldom actively involve shareholders’ main fiduciaries—the members of the
board of directors.
In the last few
years, this has started to change. Board members are increasingly taking the
stage in the company’s relations with its investors, which in turn expect easier
and more direct access to the board. Three main factors are responsible for this
cultural shift in communication practices:
executive compensation is no longer a key subject of shareholder resolutions.
Following the introduction of “say on pay,” the number of shareholder
resolutions on issues of executive compensation has declined significantly.
Adjustments to the company’s compensation structure, especially when it comes to
issues of pay for performance and pay equity, are now being discussed in the
period of time that precedes the voting season rather than in the weeks
immediately prior to the company’s AGM. Boards of directors and management have
been proactively pursuing forms of engagement with shareholders, especially the
large institutions that can make or break the advisory vote. While some
shareholders felt energized by the reform and are innovating the formulation of
shareholder proposals on this subject by pushing for new topics (including
equity retention, limits to golden parachutes, clawback policies and gender pay
gap disclosure), hardly any company can afford to walk into an AGM without
having spent the preceding months gaining assurance of the broad consensus on
its compensation policy.
become an asset class of its own.
Over the course of the last decade, activist investing has matured into an asset
class of its own, widely recognized as the driving force behind several
governance developments—from proxy access to corporate political contribution
disclosure. A force to reckon with, activists have demanded a level of attention
by senior executives and board members that had not been seen since the
corporate raids of the 1980s. Over time, activist investors have developed into
quite a heterogenous group, with different motives and investment strategies.
Among some public attention seekers and short-term speculators, it also includes
public pension funds, passive index funds, and other asset managers moved by the
belief that investing in stronger corporate governance and sustainability
practices can pay off and translate into long-term competitive advantage. This
breed of more forward-looking, consensus-building activists expects to be heard
but is open to engagement and compromise. Rather than seeking confrontation, it
is often willing to work alongside incumbent executives and directors.
ESG investing has
Once the sole purview of fringe, socially-responsible investors (SRI), issues of
sustainability and corporate social responsibility have recently gone mainstream
and found the endorsement of large mutual funds such as BlackRock, State Street,
and Vanguard. Climate change, corporate social responsibility (CSR) reporting,
human rights compliance, and corporate political contributions disclosure are
among the topics being brought to the fore during the last few proxy seasons.
Adopting a softer style than activist hedge funds, and yet resolute in their
demands, these traditionally passive institutional investors have had the clout
to command immediate attention by boards of directors. In April 2019 The
Conference Board announced the rebranding of its Governance Center as the ESG
Center, which covers corporate governance, sustainability, corporate citizenship
and philanthropy. The decision recognizes the growing importance of a strategic,
integrated approach to companies’ environmental, social and governance (ESG)
practices as well as the role that The Conference Board can perform to foster a
productive dialogue between the business community and key stakeholders.
The following are
the key insights from the study:
The most common topics of board-shareholder engagement are the choice of
equity-based awards for senior executives (whether restricted stock,
performance-based stock, stock options, etc.) and issues of board diversity
(including gender, ethnical and other minority representation). Sustainability
reporting was also indicated as an engagement topic by more than one-third of
the manufacturing companies, while almost half of the survey participants in the
financial services sector stated that their boards discuss with key investors
the design of senior executive incentive plans (specifically, the choice
performance measures, targets, thresholds and maximum payouts). While executive
compensation is the most frequent topic of board-director engagement across
segments of the survey population, the specific types of pay issues vary
depending on the size of the companies—for smaller organizations, they are the
weight of base salary and annual bonuses in the pay mix, whereas for their
larger counterparts the discussion tends to be more in-depth and focus on the
design and workings of incentive plans.
Formal, written policies for companies to regulate board shareholder engagement
are more commonly seen among larger firms and have become prevalent in the
financial sector. When adopted, these policies most frequently state: how
investors can solicit an interaction with corporate directors; the allocation of
engagement responsibilities among the board, the investor relations function,
and other members of the senior management team; who at the board level is
expected to lead the engagement process; and the topics on which the engagement
is permitted. Detailed engagement calendars are seldom included.
The boards of financial companies are the most prone to shareholder engagement,
with more than one-fourth of the survey participants from that sector reporting
more than 10 instances of engagement in the last 12 months (and one-third of
that one-fourth experiencing as many as 25 instances in the same time period).
The frequency of engagements is directly correlated to the size of the company,
as larger companies have more, scalable resources to allocate to the engagement
Recent change in
The majority of companies reported an increase in the frequency of
board-shareholder engagement in the last three years. Financial companies’
boards of directors also appear to be more proactive in seeking shareholder
engagement, with almost half of respondents from that sector indicating that in
75 to 100 percent of cases their boards that reached out to investors and
initiated a dialogue. The larger the organization, the more proactive the board
in seeking shareholder engagement.
recent board-shareholder engagements were short, and in many cases they did no
go beyond a single exchange of information. The largest share of companies
reporting at least one instance of engagement exceeding six months was seen
among large financial services companies. Engagements tend to take place in the
off-season, when governance professionals at institutional investors are not
consumed by the proxy voting process.
Large passive asset managers are the type of shareholders with which corporate
directors have been engaging the most in the 12 months preceding The Conference
Board/Rutgers CCLG’s survey, and this is particularly true for larger companies
(both by annual revenue and asset value). It is surely a reflection of the rise
of this category of institutional investors as vocal proponents of corporate
reforms in areas spanning climate change risk, diversity, board refreshment, and
sustainable procurement. Hedge funds follow on the list of the most engaged
investors across business sector and size groups, whereas public pension funds
are the most frequent interlocutor for smaller companies.
Engagement takes form through a variety of communication methods, including
email and letter exchanges, phone (or video) calls, and individual (in-person)
meetings. Emails are more commonly used by smaller companies while “fifth
analyst calls” (i.e., a separate conference call with institutional investors
dedicated to matters of corporate governance) are seldom deployed. Some
companies have been experimenting with shareholder surveys (especially to
receive feedback on pay practices) and e-forums (to extend their outreach to
At large companies, across business sectors, the board most frequently delegates
the leadership of the shareholder engagement process to the lead independent
director, whereas in most of the smallest organizations the role is performed
directly by either the CEO or the board chairman. Sixty percent or more of the
largest companies involve their general counsel in board exchanges with
A change in a corporate practice (whether the appointment of an independent
chair or the introduction of majority voting or the decision to disclose
corporate political contributions) is the most cited outcome of
board-shareholder engagement across business sectors. An exception is the
financial services sector, where half of survey respondents stated that their
board engagement with investors served to advance dialogue on a certain issue
but did not yet lead to any definitive outcome. Board shareholder engagement is
not often used as an expedient for persuading one or more investors to withdraw
a shareholder proposal.
When disclosure on board-shareholder engagement is provided, it tends to
articulate the company’s commitment to dialogue with investors, the frequency of
recently held instances of engagement, and the topics addressed in those
occasions. Financial organizations had the largest share of companies that
included in their disclosure the outcomes of their board-shareholder engagement
Across sectors, the main factor preventing additional board-shareholder
engagement is the time constraint by shareholders, which may not have the
internal expertise and resources to implement a systematic engagement program
across their company portfolio. Larger companies are the group that most
frequently cites time availability by their own board members as the number-one
impediment to more engagement. Management staffing considerations and regulatory
concerns are among the least relevant restraining factors. Many companies
explicitly restrict the engagement to discussions about publicly available
information, even though the consensus among legal scholars and practitioners is
selective discussion of corporate governance and organizational practices does
not constitute a violation of Regulation Fair Disclosure (FD).
Frequency of board-shareholder
According to the
industry analysis, the highest percentage of companies reporting more than 10
instances of board-shareholder engagement in the 12 months preceding The
Conference Board/Rutgers CCLG’s survey is seen in the financial services sector
(26.3 percent, of which about one-third experienced more than 25 engagements).
The company size review offers additional insights: Among the largest companies
by revenue, only 10 percent of respondents said that their board never engaged
with shareholders in the previous 12 months, compared to about 42 percent of
respondents in the smallest revenue group. A similar direct correlation is seen
in the asset value analysis for financial services companies, where the
percentage of boards of firms with assets valued at under $5 billion that never
engaged is more than twice the percentage seen in the largest company group with
assets valued at $100 billion and over. Financial services boards report
engaging with shareholders more frequently than their counterparts in larger
size groups: 36.4 percent of them, more specifically, had between 10 and 25
occurrences of engagement over the course of the previous 12 months. See Figures
1a and 1b.
publication, including footnotes, is available
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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