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 strategy.
Identify your shareholders
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 shares
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 organisation 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 organisation 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 organisations 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 recognise 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 most
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 Glass Lewis.
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 advisers
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 analyse 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.’
Maintain shareholder relationships
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 achieved.
[Article by Brendan Sheehan, Corporate Secretary]