As most public companies approach the start of Proxy Season 2017, investor voting policies and the hottest trends in corporate governance are important content that highlight issues companies will face at their annual meetings. Equally important are the practical considerations for how to navigate the proxy advisers, engage with investors, react to activists, and position boards for successful voting outcomes.
The landscape has changed in 2017. Most of the fundamental views in governance are out on the table. Say-on-pay as a ballot item is over five years old, director independence has been around over a decade, and Sarbanes-Oxley drove significant changes in audit committees nearly fifteen years ago. What has evolved recently is the way in which companies interact with the governance community. A thoughtful approach and clear messaging to the various constituents that will influence proxy season outcomes are as important as the issues underlying the narrative. With that in mind, here are seven helpful hints for the 2017 proxy season, along with dos and don’ts for a successful season.
1. Revisit your proxy adviser outreach plan. Both ISS and Glass Lewis have new staff in key roles, with changes in research leaders over the past year. As the governance community has expanded and many proxy advisory leaders have served in their roles for over a decade, departures have accelerated and will likely continue. In addition, ISS has undergone several ownership changes in recent years, and the focus on being a governance data provider has become a different value proposition for both customers and employees. Institutional knowledge and opinions may not carry the same weight as in the past and you may, in some cases, be meeting with less experienced staff than you did last year. Don’t rely on your past messaging to resonate with proxy advisory firms. With new staff at both major proxy advisers, do review and refresh your narrative to ensure the messaging is clear and concise.
2. Leverage the benefits of potential regulation to engage with ISS and Glass Lewis. With the new Trump Administration, regulation of proxy advisers may gain traction. Proxy advisers have more incentive to engage actively with the governance community, especially corporations, so they don’t alienate companies and add fuel to the arguments supporting regulation. Don’t assume that proxy advisers are not open to thoughtful discussion on the issues. Do understand and participate in their engagement channels. ISS has many approaches to engaging with its research team, and it is important to understand what works and what is not as effective when reaching out to its staff.
3. Laser-focus your investor approach. Many investors are pressed for time and struggle with the resources to engage. Even the large investors have staffing constraints and must increasingly quantify which engagement requests to accept. Their willingness to engage may also be influenced by their portfolio holdings and their policy interests. Don’t treat engagement casually or assume that what worked in the past is optimal. Do establish year-round communication channels, make your reasons for engagement clear, and follow up on any agreed-upon action items.
With the continuous impact of political changes, market developments, regulatory attention, and intensified shareholder demands, the challenges for CEOs and boards to navigate Proxy Season 2017 will be intense. But agile adaptation, with a focus on both the strategic and the tactical, can go a long way toward leveraging the new challenges and changes to benefit companies and their shareholders.
4. Be ready to pivot on regulation. Changes are coming at the SEC. With vacancies at the Commission and the departure of Mary Jo White, new personnel and regulatory changes are forthcoming. The Republican Congress and the Trump Administration already have Dodd-Frank in their sights to repeal or amend key provisions, including the CEO Pay Ratio Disclosure, with general industry advice to carry on for the moment and prepare for inclusion of the ratios in the 2018 proxy material. Don’t be caught off guard if new regulations are implemented or repealed, or if expectations for rolling back provisions in Dodd-Frank do not materialize. Do stay on top of changes at the SEC.
5. Think activism every day. Activists have had mixed success, with much coverage of the winners and losers from the past year. Both groups remain highly incentivized, and they will remain part of the landscape. An activist attack is not only an opportunity for the activist to create change, but it will be used as a calling card for them to gain more investors for their funds. Investor backlash to excessive share buybacks and quick settlements for board seats is trending in 2017, and investors expect boards to carefully consider any actions in a strategic context. Don’t settle too quickly. Do consider all activist approaches seriously, ensuring that a vulnerabilities assessment and scenario planning are included in the board’s must-have toolkit.
6. Invest in your board. Board vulnerabilities abound. Serving as a board member is a part-time job that requires a full-time commitment and can lead to exposure to lawsuits from cyber-attacks, audit issues,?or a multitude of other risk factors. Directors must have access to the requisite resources, information, and support needed to fulfill their fiduciary duty while recognizing that in some cases, this includes knowing how to communicate most effectively in meetings with investors and proxy advisers. Don’t exclude directors from engagement meetings, since the meetings can be more successful with the participation of articulate, independent directors. Do work with directors, particularly board leaders, to be more visible in the governance community.
7. Monitor social media. Monitor the messaging; it matters. Beyond the traditional journalists and news outlets, social media can influence the voting outcome in profound ways, not just the Presidential election or the new Administration’s penchant for late-night Twitter messages. It is important to remember that the information being disseminated by other parties does not have to be true; it just has to be compelling for a social media audience. Don’t assume that the traditional news outlets tell the whole story. Do track social media, and consider that your investors and proxy advisers will be exposed to its content.
Along with these tactical approaches to Proxy Season 2017, investors and proxy advisers expect that all of the engagement and disclosure will tie back to strategic imperatives and the creation of long-term value for shareholders, particularly in a year when the geopolitical climate is anything other than what was anticipated. BlackRock CEO Larry Fink was clear in his 2017 letter to CEOs of BlackRock’s portfolio companies: “As BlackRock engages with your company this year, we will be looking to see how your strategic framework reflects and recognizes the impact of the past year’s changes in the global environment.” With the continuous impact of political changes, market developments, regulatory attention, and intensified shareholder demands, the challenges for CEOs and boards to navigate Proxy Season 2017 will be intense. But agile adaptation, with a focus on both the strategic and the tactical, can go a long way toward leveraging the new challenges and changes to benefit companies and their shareholders.
About the authors
Dr. Martha L. Carter is a Senior Managing Director and Head of Teneo Governance. She leads Teneo’s corporate governance division, advising CEOs and boards of public and private companies on corporate governance best practices, activism defense, executive compensation, shareholder engagement, strategy, and other matters that come to the board. Dr. Carter currently sits on the Advisory Council of the Harvard Corporate Governance Forum and the Markets Advisory Council at the Council of Institutional Investors (CII).
Karla Bos is a Managing Director with Teneo Governance. Ms. Bos has over 20 years’ experience in the financial and legal services industry, with an emphasis on corporate governance. She has a successful track record of developing and managing efficient, compliant systems within fast-paced, rapid-growth, service-intensive companies. Ms. Bos is also an experienced public speaker, having developed and presented a number of sophisticated business proposals to C-suite and board level audiences.