As the great philosopher Mike Tyson once said, “everyone has a plan until they are punched in the mouth”, and the 2021 proxy season was an uppercut that caught many companies by surprise. Not only did companies see a record number of shareholder revolts, but – in many cases –adverse votes came after seemingly positive discussions with those same shareholders. Indeed, companies were confronted with a number of significant – and we think lasting – shifts:
As we described in our Key Themes from 2021 Proxy Season, growing consensus on the value implications of key environmental, social, and governance factors (ESG) – combined with increased pressure on investors themselves to take a more aggressive approach – drove a “sea change” in voting approaches and results.
Shareholders increasingly relied on bright-line voting policies, were less receptive to making exceptions to this one-size-fits-all approach, and were less likely to be swayed by last-second “in-season” engagements
Activist hedge funds began using more E&S critiques as the ‘tip of the spear’ in their campaigns, which served to bring more shareholders into the tent at contests like ExxonMobil.
Now that the initial shock from these changes has passed, it is crucial that companies activate a strategic plan to address governance vulnerabilities, refine ESG strategy & disclosure, and reimagine how they approach “off-season” shareholder engagement under this new world order. For companies that want to optimize shareholder support and ensure directors aren’t targeted at the next annual shareholder meetings, here are several SGP recommendations informed by recent dialogue with our clients, industry leaders, and institutional investors representing over $25 trillion in assets under management:
1) FIRST IMPRESSIONS MATTER
In many shareholder engagements, investment stewardship teams are making decisions in the first few minutes of an engagement. They are instantly evaluating whether a company is prepared, credible, and authentic on the relevant ESG issues in question. In today’s Zoom world, time is short and attention spans are shorter. And the members of the stewardship teams are sharing these impressions with each other in real time , which influences the tenor and direction of the conversation. Long-term, this initial impression may linger and ultimately sway an investor on a close voting decision.
Action: Companies need to ensure meetings get off to a good start and that participants strike the right balance of expertise and humility, while authentically soliciting investor feedback on the issues that matter.
2) TAILOR THE CONVERSATION TO THE INVESTORS’ PRIORITIES AND POLICIES
The days of thinking of “off-season” engagement as simply an opportunity to check in with investment stewardship teams, read out on the company’s accomplishments, and build a long-term relationship, are gone. Today, “off-season” engagements may be the only time that companies can get investors’ full attention, which means companies must be prepared to discuss and receive feedback on the ESG issues that are the highest priority for each respective investor. Moreover, with institutional investors increasingly relying on bright-line voting polices, companies must be proactive in identifying – and alleviating – friction areas between investor priorities and company practices. Fortunately, investor transparency has been greatly enhanced in recent years as investors have published perspectives, policies, and voting rationales that highlight their hot-button issues, philosophy, and decision making.
Action: Companies need to ensure they are targeting the right issues in each engagement by leveraging enhanced investor transparency and the guidance of trusted advisors.
3) INVITE THE RIGHT PEOPLE
As investment stewardship teams cover a broader set of ESG topics in greater depth than ever before, it is crucial that companies include the right subject matter experts and potentially independent directors who can discuss the boards’ oversight role . Though it is impossible to predict every topic that could come up on a shareholder engagement, by focusing on each investors’ priorities, companies should be able to anticipate most of the core topics and include the right company participants. Also, keep in mind that director engagement is a now-established best practice, and that passive as well as active managers might appreciate the opportunity to engage with board members tasked with representing shareholder interests.
Action: Companies must invest in designing the agenda, selecting the right internal participants, and preparing them with points to highlight and questions to expect. Be flexible; it is likely that the list of participants at the board- and management level will change based on the investor.
4) ENGAGE IN A REAL CONVERSATION
Off season engagement is not the time to audition for a TED talk. Most investors will expect a few comments at the beginning of the conversation to set the stage, but increasingly want to engage in dialogue, not receive a lengthy dissertation on the company’s priorities. Further, most companies will have no more than 1-2 conversations with the proxy voting teams from some of their largest, passive investors each year, so it is vital that companies ask questions, listen, and engage in an authentic dialogue. Though this may be uncomfortable because the engagement won’t be as scripted as in years past, this is the new norm and leading companies will quickly adapt.
Action: Engage in back-and-forth dialogue with investors, solicit feedback, ask questions about ESG priorities, and be responsive as appropriate. If an investor voted against management on a specific issue, be willing to address it directly and gain insights into possible ways to address the investor’s concern.
5) ASK FOR SUPPORT
In past years, leaders and directors became adept at “reading the room” to determine if their message was resonating and investor support was secure. Unfortunately, the combination of investor policy & people changes, extensive use of video conferencing, and investors’ tendency to avoid adversarial conversations has rendered such “investor radar” less accurate. Further, we have seen the diminishing effectiveness of last-minute shareholder engagement as investors increasingly believe that the time for companies to be responsive to investor feedback is prior to the printing of the proxy, not a few days before the shareholder meeting. In other words, the time for crucial conversations is now, not next April or May.
Action: Close the shareholder engagement by confirming that the investor will be supportive. If there is hesitancy, probe the investor to uncover points of concern. It is better to uncover points of contention now, rather than to be potentially blindsided in the spring.
CLOSING THOUGHTS
The 2021 proxy season should serve as a wake-up call for companies that company-investor interactions have fundamentally changed. Today, under increasing pressure from their own clients, investors look at a broader universe of relevant ESG topics, analyze issues in greater depth, and are more willing to vote against directors who fail to live up to their rising expectations. As investors pivot in their approach, companies must do so as well.
