Today, shareholders are increasingly demanding corporate accountability on a variety of issues, ranging from compensation and human capital management to governance and board diversity, among others. As a result, most companies will need to consider the most effective ways to engage with their key shareholders. Shareholder engagement can come in a variety of forms, including proxy statement disclosure, investor relations (IR) activities, earnings calls and road shows.
This guide focuses on direct engagement between a company and institutional shareholders outside of a contested election. Whether a company needs to engage with its key shareholders to address a specific governance or executive compensation issue or as part of an annual or ongoing program to foster good relations, it should consider certain factors such as purpose, timing, participants and legal requirements which are discussed below.
A company may have different motivations for shareholder engagement, but chief among them should be the desire to foster a good relationship with its key investors. For many companies, those include large institutional investors, including index funds, which are long-term investors that are required to own the company’s stock. Ongoing dialogue with shareholders can help companies understand the factors driving their voting decisions while also giving shareholders a better understanding of the company’s approach towards issues such as corporate governance, executive compensation and sustainability.
Companies may also use engagement to prompt and receive feedback for proposals or other non-material changes that they are contemplating. If a company establishes an ongoing annual off-season engagement program, it may benefit from the investor goodwill or relationship capital that it has developed when faced with a crisis or other important issue requiring shareholder support. Annual shareholder outreach may not always result in actual meetings with certain shareholders, as they may determine that a discussion is not warranted in light of their engagement priorities and workload. Nevertheless, the gesture of extending an invitation for dialogue is likely to engender goodwill.
Engaging with shareholders regularly may also serve as a defensive measure against activist shareholders. Even an activist shareholder with a relatively small ownership position can wage a credible or even successful proxy fight, distracting management and forcing a company to spend valuable time and resources. For example, in May 2021, activist fund Engine No. 1 was able to win its proxy fight with Exxon Mobil, securing three board seats with just a 0.02% stake. The success of such activist campaigns usually requires support from a company’s large institutional shareholders (reportedly a key factor in the Exxon Mobil contest was Exxon Mobile’s history of inattention to shareholders and their concerns1).
Regular engagement with shareholders may decrease the appeal of an activist’s campaign if management has demonstrated a willingness to engage with and solicit feedback from investors. Where a strong track record for engagement exists, particularly where a company has demonstrated a history of considering investor feedback into its decision‑making, shareholders may be more likely to give management the benefit of the doubt if the company faces an activist threat.
Responding to a Poor Vote Outcome
Even if a company decides not to conduct ongoing shareholder engagement, it may occasionally want to engage shareholders on a specific issue following an annual meeting. For example, if a company fails its say-on-pay vote or receives a significant level of opposition, it should reach out to its shareholders to get additional feedback to understand shareholders’ concerns with its executive compensation plan. Many shareholders will expect companies to engage with them if there is significant opposition to one of the company’s directors or proposals. Similarly, if a shareholder proposal receives significant support from shareholders against the recommendation of the board and opposition by management, a company should look to engage with shareholders to better understand the reasons for their support.
Proxy Advisory Firm Expectations
Both of the major U.S. proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, have set shareholder support thresholds for proposals below which companies are expected to engage with their shareholders. Under its U.S. Proxy Voting Guidelines, ISS may recommend against the members of a company’s compensation committee if its say-on-pay proposal receives less than 70% of votes cast and the company does not disclose in its proxy statement following that annual meeting its engagement efforts with major institutional shareholders. Such disclosure should reveal the nature of the engagement, specific concerns raised by shareholders and the company’s specific actions to address those concerns. Similarly, if a company’s proposal fails to receive at least 80% support (or a shareholder proposal receives a majority of votes in favor), Glass Lewis will generally consider the board’s responsiveness, including assessing its engagement with shareholders on compensation issues as disclosed in its proxy statement, in determining whether to oppose management’s proposal or recommendation. Engaging with shareholders and disclosing such efforts in its proxy statement should improve a company’s ability to garner support from ISS and Glass Lewis for a company’s next meeting following a poor voting outcome. It will also garner goodwill with shareholders, even if they were not among those solicited for engagement.
For most companies, the proxy off-season (typically between September and February) is the optimal time to engage with institutional shareholders. This follows the busy proxy season when most companies have their annual shareholder meetings for which institutional investors may be voting a myriad of proxies. Given the volume of annual meetings and votes to be cast, many institutional shareholders will not have the bandwidth to entertain requests for post-annual meeting discussions until the proxy season is over. Note, however, that some shareholders will meet with companies during the proxy season under special circumstances (e.g., an adverse proxy advisor recommendation for an annual meeting proposal).
In addition to the greater availability of shareholders to meet during this period, there are other practical considerations. Some shareholders must annually file Forms N‑PX with the SEC disclosing how they voted their shares at annual meetings for the most recent 12-month period ending June 30. Forms N-PX must be filed by August 31 each year, after which date voting information is publicly available for shareholders who file Form N‑PX. In addition, some other institutional investors (e.g., CalPERS) will publish an annual record of all or a portion of their shareholder meeting votes on their website. Companies can use this information to determine which engagements to prioritize as it will reveal whether a shareholder has voted against a company’s proposal.
Companies should consider starting the engagement process shortly after voting information from their last shareholders’ meeting becomes available. Given the busy schedules of senior management and board members who will be participating in the engagement, the company’s shareholder engagement planner (usually the head of IR or the corporate secretary) should ensure that there is enough time to identify, confirm and schedule the dates for multiple shareholder meetings. The window for engagement narrows significantly with the start of proxy season in early March, so companies should begin the process of confirming participants’ availability early.
Engagement During Proxy Season
Sometimes companies will need to engage on a more urgent basis during the proxy solicitation for an annual meeting in order to solicit the support of key shareholders for the company’s proposals or opposition to a shareholder proposal. This often occurs if ISS or Glass Lewis recommends against a director or one of a company’s proposals, or for a shareholder proposal. In such a situation, there is a shorter engagement window, typically just the two or three weeks from the date when the proxy advisory firm issues its voting recommendations for the meeting until the meeting date. However, even with the shortened timeframe, shareholders may be willing to meet with the company to gain clarity on its proposal (or opposition in the case of a shareholder proposal) prior to voting. Companies may also seek to engage with shareholders ahead of the release of recommendations from the proxy advisory firms if early proxy voting results indicate lack of support for management’s proposals. Sometimes by using a proxy solicitor a company can identify how a shareholder has or is likely to vote and attempt to get the shareholder to vote in favor of the company’s proposals.
For most companies, institutional shareholders, including large index funds, own a significant portion of their outstanding shares. In 2017, the three largest global asset managers, Vanguard, BlackRock and State Street, combined held 20.5% and 16.5% of the shares in the S&P 500 and Russell 3000, respectively, and their ownership and related voting authority is projected to increase for the foreseeable future2.
Generally, these institutional shareholders vote substantially more often than retail shareholders. Therefore, given their significant ownership percentages and likelihood of voting, most companies will want to focus their engagement efforts on institutional shareholders, particularly the larger holders.
A company can learn the identities of its institutional shareholders by reviewing SEC filings on Forms 13F, 13D and 13G. However, understanding actual voting authority for an institutional shareholder may be challenging, particularly in the case of funds where voting authority may be delegated to managers or other entities. Depending on the size and organizational structure of the shareholder, there may be a separate stewardship team or committee that handles proxy voting that is distinct from the portfolio managers who make investment decisions. A company should identify the actual voting authority at each of its institutional shareholders so that it can appropriately target its outreach efforts. Moreover, a number of institutional investors publish their voting guidelines, which can help companies assess how an institutional investor is likely to vote on a particular proposal.
A company looking to establish an ongoing engagement program should reach out to shareholders holding a significant number of its outstanding shares (e.g., greater than 50%). For many companies this might consist of their top 25 institutional shareholders. Although the outreach may be broad, only a few shareholders may accept an invitation to engage each year, unless there are material performance or governance issues. Following an annual meeting at which there was significant shareholder opposition to the company’s proposals (or support for a shareholder proposal), a company can expect to see an increase in the number of shareholders accepting invitations to engage.
The company’s shareholder engagement planner should keep track of which investors were contacted and which accepted each year. In subsequent years, prioritization for outreach should be given to shareholders that did not meet with the company during the prior year or two (or even several years, depending on such investors’ volume of, and the company’s bandwidth for, engagement).
A company may also opt for a more targeted approach that prioritizes its most disaffected shareholders for engagement in a particular year. If using such an approach, it can look at N-PX filings or other sources to see which shareholders opposed the company’s proposals at the last annual meeting and target them for outreach. For shareholders who are not N-PX filers or do not otherwise publicly disclose their voting, a company may work with a proxy solicitor to estimate how those shareholders may have voted (based on voting guidelines, historical records and other factors) and to determine whether they should be contacted.
The primary purpose for the engagement will often dictate which individuals from the company should participate. Generally, a company’s engagement team will consist of the most senior members of management who are knowledgeable about the primary purpose of the engagement. For example, if the subject of the engagement includes corporate governance issues, a company’s general counsel and/or the corporate secretary should participate; or if it involves executive compensation, the head of human resources. Someone from the company’s IR team should also be involved as they should already have a relationship with key contacts at the company’s shareholders and can facilitate introductions and scheduling meetings. A company’s IR officer can also provide continuity between discussions of financial performance issues that may be addressed in other forums such as earnings calls and governance or ESG-focused topics that may be the subject of the engagement.
While board members do not need to be involved in shareholder engagement, shareholders will often want to hear from a company’s board members and their participation may increase a shareholder’s willingness to engage (some institutional investors will desire board member participation, but some are explicit that it is not necessary or even seem to discourage it). Some issues, like executive compensation, will mandate the involvement of the board, typically an independent board chair or lead director, or the chair of the compensation committee. In fact, shareholders will often decline meetings to discuss executive compensation issues if the chief executive participates, so the participation of relevant board members may be required.
In addition to senior management or the board, the company’s engagement team may include other personnel or outside experts who are well-versed in the issues that are the subject of the engagement. For example, a company may include a less senior executive if he or she is a subject matter expert and is better-suited to answer more technical questions that a board member or senior executive would be unable to adequately address. Companies may also want to have outside advisors, such as legal counsel or compensation consultants, available for the engagement in a limited role. However, companies should bear in mind that some shareholders will bar such advisors from participating in their engagements.
The engagement team should also appoint someone to take notes at the meeting to ensure that investor feedback and company statements are captured accurately. A company’s IR officer, corporate secretary, general counsel or another in-house attorney may fulfill this critical role. An outside advisor may assume this role as well if agreed to by the shareholder. Thorough note-taking will not only document the engagement conversation, but can serve as a foundation for a company’s action plan following the engagement meeting, as well as provide a basis (backup) for public disclosure as discussed below.
To prepare for each shareholder engagement, the engagement team should research the voting policies of the shareholder and the proxy advisory firms on the relevant issue. Many large institutional shareholders and the proxy advisory firms make their proxy voting guidelines publicly available. Some large institutional shareholders, such as BlackRock, also publicly announce their engagement priorities annually and/or publish a quarterly list of all companies with whom they engage, as well as the key topics addressed in their engagement meetings. The engagement team may work with outside advisors to prepare for an engagement meeting by reviewing messaging, going over potential questions (based on the company’s specific issues or the shareholder’s priorities) and planned responses, and holding mock engagement sessions. If possible, a company should also obtain the names and titles of the shareholder representatives with whom it will be speaking in advance in order to identify potential questions or areas of focus based on their backgrounds and roles.
Typical engagement meetings may last from 30 minutes to an hour and may be held telephonically, by videoconference or in person. Companies should prepare a brief agenda for the meeting to help frame the discussion. After both parties introduce themselves, the person leading the meeting, which is usually the company’s senior-most executive present or board chair/lead director/committee chair, may provide a brief overview of the company’s operations or recent publicly disclosed financial performance. Following the overview, the company should address the key issue or issues that it wishes to discuss and provide a rationale for its decision-making. For example, if the purpose of the engagement meeting is to discuss executive compensation, the company should briefly provide an overview of its compensation plan’s structure, philosophy and link to performance or long-term strategy.
A company’s engagement team should use the meeting as an opportunity to explain the company’s programs and policies and solicit feedback for the board’s consideration. This is particularly important in an engagement meeting following a shareholder vote in which there was significant opposition to the company’s proposals or support for a shareholder proposal. If the company received a negative recommendation from a proxy advisory firm, it should avoid attacking the firm or its policies and instead focus on addressing any issues raised by the proxy advisory firm and explain the merits of the company’s policy or approach. The company should allot enough time for the shareholder to ask questions and present its own views on the relevant issue and other topics important to it.
Companies should also be prepared to talk about issues that may not be the primary focus of the engagement for the company but are engagement priorities for the shareholder. For example, a company that received low support for its most recent say-on-pay proposal should not only plan on discussing its executive compensation program, but other governance issues as well, even though they may not have been the subject of voting at the meeting. A shareholder may use the engagement to educate the company on its views on areas of interest to better understand the company’s approach to them.
Following each shareholder engagement meeting, the company’s engagement team should conduct a meeting debrief. This will provide the engagement team with an opportunity to discuss any shareholder feedback received. Notes taken during the engagement meeting can be the basis for such discussions, providing participants with the opportunity to add their own recollections of the conversation. After multiple calls, the team should be able to discern certain themes from the various engagement meetings and should then summarize them for the board’s consideration. The company should also document its engagement process and shareholder feedback, relying on notes taken, so that they can be described in the proxy statement for its next annual meeting. In assessing whether a company has been responsive to shareholders’ concerns, proxy advisory firms will look for evidence of shareholder engagement in a company’s proxy statement and may recommend against the election of directors if such disclosure is omitted.
When engaging with shareholders, companies must consider the impact of Regulation FD and other federal securities laws. Regulation FD under the Securities Exchange Act of 1934, as amended, prohibits companies from selectively disclosing material non-public information to shareholders. The regulation requires that when a company makes an intentional disclosure of material information, it does so through widespread, public means. However, if the company discloses material information to only some shareholders unintentionally, it must publicly disclose the information promptly by filing a Form 8‑K or disseminating it through another method. Accordingly, a company should be careful not to disclose material, non-public information during an engagement meeting. The company’s engagement team should focus the conversation on topics such as corporate governance and executive compensation and should avoid discussions of undisclosed corporate strategy or forecasts of operational or financial performance. Most public companies will have already established communications policies to educate their senior executives and other personnel who communicate regularly with analysts and other members of the investment community. However, if board members or other participants who have not received Regulation FD training are involved in the engagement, the company or its legal counsel should provide them with the necessary training in advance.
To reduce the risk of inadvertent disclosure of material, non-public information during engagement meetings, some companies may use a slide deck or a script containing only publicly available information to guide the conversation. The company would typically not have to file written materials used for engagement during the off-season with the SEC under Exchange Act Rule 14a‑6, which requires filing of written solicitation materials used to solicit proxies. However, if the engagement meeting occurs during the proxy solicitation period for a shareholder meeting, any decks or other materials distributed to shareholders may be subject to Rule 14a‑6, which would require the company to file them on EDGAR as supplemental proxy materials. A company should have legal counsel review any slide decks or other written materials that it distributes to shareholders in connection with an engagement meeting to help with its analysis and consideration of filing requirements.
As environmental, social and governance (ESG) risks and opportunities have become an area of intense focus for many institutional shareholders, companies should anticipate that many shareholders will scrutinize their ESG disclosures and practices and focus on them during engagement meetings. Earlier this year, BlackRock announced plans to engage with more than 1,000 companies on climate issues and 150 companies on social risks. Similarly, in his CEO's Letter for 2021, Cyrus Taraporevala, President and CEO of State Street Global Advisors, noted that State Street would focus on climate-related risks and diversity in its engagement with companies. Companies should be prepared to discuss their approach to climate risk, diversity (particularly at the board and C‑suite level) and other ESG-related risks and opportunities that are significant for the company. Shareholders are also interested in understanding the board’s role in overseeing ESG. Board members who participate in shareholder engagement should make sure they understand and can speak to ESG issues that are likely to have a material impact on the company and its business.
1. [“Exxon Mobil Activist Victory Isn’t Really All About Climate,” Jinjoo Lee, The Wall Street Journal, June 3, 2021, and “How Exxon Lost a Board Battle with a Small Hedge Fund,” Michael J. de la Merced, The New York Times, May 28, 2021.]↩
2. [Lucian Bebchuk & Scott Hirst, The Specter of the Giant Three, Volume 99, Boston University Law Review (2019). ]↩