Proxy Season Preview: US Investors Channel Teddy Roosevelt & More
Every proxy season has its own personality, with notable twists and turns, including some that are predictable and others that are not. Following recent conversations with institutional investors, asset owners, shareholder proponents and regulators, here are our four key takeaways heading into the 2024 season:
Large U.S. investors channel Teddy Roosevelt, speaking softly and carrying a big stick: As the topic of ESG has grown divisive and politicized, investors have refined their policies, communications, and advocacy. In private conversations with companies, investors continue to push for improved governance practices (table stakes), appropriate executive compensation programs, fit-for-purpose boards, and identification and oversight of long-term risks to the business.
BOTTOM LINE: Investors are toning down the public rhetoric but will still vote against the company when it comes to shareholder proposals, director nominations, and say on pay – particularly if the company is an outlier versus peers or expected market practices.
Shareholder dialogue is mandatory: In an increasingly polarized environment, real dialogue with investors is vital, especially with your long-term investors. Consistent engagement can identify points of friction, build trust to shore up support, or provide an early warning signal if there is potential for financial or issue (environmental and social) activism. For some investors, direct dialogue with directors is expected; for others, director participation is not necessary. Investors are not a monolith, and direct conversations are required to understand their increasingly diverging views.
BOTTOM LINE: If you have concerns about your annual meeting, develop a targeted communications and engagement plan, and ensure you have the right person/team communicating the company’s message. Leverage expert advisors who know your investors, so that you understand your audience, can meet each individual investor’s unique expectations, and deliver the annual meeting results the board expects. Finally, take note that prevention is the most powerful medicine – engaging consistently, year after year, is the best enabler of annual meeting success.
Activism is rampant: “Big A” (hedge fund) and “little a” (environmental, social, and governance) activism is unrelenting. While these attacks may seem unwarranted from inside the company, boards and management teams are best served by being open-minded to new ideas presented by investors. An overly defensive stance (the ‘old playbook’) does not land well with institutional investors. Alternatively, rushing to reach a quick settlement, with either type of activism, may not be in the best interests of long-term investors and may ultimately destroy value.
BOTTOM LINE:A measured case-by-case approach, informed by extensive dialogue with long-term investors, and careful consideration of the pertinent issues is often the best path forward. And remember, shareholder activism has evolved significantly in recent years, therefore a fresh, tailored response plan is necessary.
Companies should avoid the Culture Wars: Companies are increasingly being pulled into the ESG culture wars on a growing list of politicized topics. Our advice: Take principled, consistent positions on the topics that impact long-term value. Ensure robust governance and transparency around these topics. Stay neutral on the issues that are not relevant to your business and its stakeholders. If you have not done the work to identify which issues are financially relevant to your company, engage in this process without delay.
BOTTOM LINE: Materiality matters – and should underpin your approach on all ESG matters. It is just as important to know what is “in” (material) as what is “out” (immaterial) so that you may engage on these issues accordingly.
