Proactive engagement in the age of shareholder activism
A FEW years ago, the chairman of a banking and financial services giant had the unenviable task of facing a group of angry shareholders over the issue of executive pay packages.
The bank’s management put forward a remuneration report that would have awarded its chief executive over $6 million in salary and bonuses despite the institution’s underperformance.
The report was thumbed down by 32 percent of the shareholders, and the chairman, amid jeers and laughter, had to apologize to the shareholders for not communicating with them more clearly prior to the annual general meeting. The media back then called it one of the biggest shareholder rebellions in recent history.
Shareholder engagement
While an extreme case, that bank’s experience underscores the importance of having good shareholder engagement practices, especially at a time when legislative changes have given shareholders a greater voice in companies’ activities.
Here in our own backyard, the Securities and Exchange Commission (SEC) has proposed significant changes to the Corporation Code of the Philippines.
Some of the amendments have generated much debate from the business sector side (e.g., regulations that apply to all companies, regardless of size; regulations on board composition and term limits for directors), but there are also amendments that support greater shareholder engagement, such as the proposal to increase the number of shareholder votes needed before a board can amend its byaws (from 50 percent + one to two-thirds, which is effectively 67 percent), and another one that specifies a laundry list of documents boards are required to provide to shareholders during stockholder meetings.
We at Deloitte back this move toward proactive shareholder engagement, which helps companies strengthen their relations with shareholders by building trust and credibility. However, the issue as to whether the proposed changes in the regulations should be mandated or simply prescribed as best practices is the cause of concern for certain sectors.
It is not yet clear if the ‘comply or explain’ rule comes with penalties, and how punitive these can be.
Valuable feedback
But there is no question that good engagement practices provide the board with valuable feedback about shareholders’ priorities and concerns.
In a paper titled “Proactive engagement: Opportunity to build stronger relationships,” we share some ideas on the board’s role in shareholder engagement, and how and when boards should reach out to shareholders.
As an initial step, boards should look at where management has positioned shareholder communications on a continuum between reactive or passive compliance-based communications on one end, and proactive shareholder engagement at the other.
Ideally, the board should be satisfied with the company’s position, and key shareholders should agree with that positioning.
Traditionally, a company’s Investor Relations (IR) group has provided shareholders with information regarding the company’s performance, operating results, competitive positioning, and other matters.
But the IR group may not be the best party to engage with shareholders on governance issues.
Some companies have implemented a governance function, often through the corporate secretary or general counsel, to lead engagement on governance matters, such as executive compensation and board composition.
When shareholder engagement is a shared responsibility among different groups, it is important that these groups coordinate and support each other so that shareholders receive consistent information about the company.
Key insights
Boards may want to draft a shareholder engagement policy that provides a framework for topics appropriate for discussion with shareholders (along with those that are not), identifies who should engage shareholders on what topics, and sets out a process for addressing specific concerns.
Abe Friedman, the founder and managing partner of CamberView Partners and an adviser to the boards and management teams of public companies on how to succeed in shareholder engagement, shared some more insights in the Deloitte paper:
- Companies can’t talk to all of their investors. What they can do is focus on key influencers and those shareholders with the most meaningful impact so they get good insights into the sentiments of the investor community.
- The best time to meet with shareholders is outside proxy season. During this time, companies should share information about strategy, operations, and future direction, among others. This way, when it is time for a shareholder meeting, the company only needs to respond to immediate questions from investors.
- To be successful at engagement, companies need an open line of communication between investors and a designated individual who is part of the leadership team.
Companies that take a reactive approach to shareholder engagement—reaching out to shareholders only when a critical proposal arises—may not be successful in engaging their shareholders when they need their support.
In an atmosphere where there is mutual trust and respect between the board and management and the shareholders, leaders will not have to worry about being heckled or taunted when they talk about their plans for the company’s future success.
(The author is the managing partner & CEO of Navarro Amper & Co., the Philippine member firm of Deloitte Southeast Asia and the 2014 president of the Management Association of the Philippines or MAP Feedback at [email protected] and [email protected]. For previous articles, please visit map.org.ph.)
