Rob Swystun, Pristine Advisers
Today is all about exploring yet another tool in the battle against shareholder activism.
This time it’s governance roadshows. These roadshows, says Lex Suvanto, Managing Director of Financial Communications and Special Situations, Edelman, writing for the Huffington Post, are where companies meet with governance experts within their institutional investors.
This is a break from tradition, as public companies typically have focused on portfolio managers and analysts who actually pick the stocks and make the purchasing decisions. However, what companies are now coming to realize is that there are an entirely different set of professionals that work within institutional investing firms who evaluate and make proxy voting decision and who are usually in the thick of things during a proxy battle.
As a result of this, investor relations officers and management teams have begun dedicating time and resources to meeting with these governance experts with the goal of improving communication surrounding governance issues and increasing the chances of a favorable vote when contentious issues do happen to arise.
Feeding this trend of governance road trips is the decreasing reliance that institutional investors have on recommendations from proxy advisory firms like ISS or Glass Lewis. They are now relying much more on their own proxy voting policies to guide their own voting.
Benefits of governance roadshows that Suvanto lists include:
- helping the board make informed decisions on governance matters and emerging issues (like board tenure, board diversity, and proxy access)
- limiting the surprise of future votes
- helping influence the way investors vote based on hearing a company’s rationale and philosophy on governance matters
- allowing companies to establish a personal relationship with proxy voters, theoretically facilitating future discussions and mutual understanding
- acting as a preemptive measure to activist investors who are communicating directly with the governance folks within a company’s investor base
On the other hand, there are risks and obstacles to governance-side engagement, according to Suvanto.
- Because many companies already fail to dedicate enough time to their core investor relations programs, adding new responsibilities and more meetings to the annual schedule can be problematic
- Because the governance department within investment firms is usually small and they may not be able to accommodate meetings with executives from all of their portfolio companies, big companies usually get an audience while smaller companies are sometimes left out
- Some people view governance meetings as a waste of time, because proxy votes often follow a formulaic policy
- Although opening a dialog about controversial governance topics is meant to have positive implications, those can quickly turn sour if a governance expert makes a suggestion about a specific bylaw or issue and the company chooses not to act on that suggestion
- Starting a dialog may raise issues that were previously under the radar of busy governance experts who wouldn’t have known about them otherwise
For those who want to set up governance meetings, Suvanto suggests the following tips:
Know your facts:
Find out what ISS and Glass Lewis have recommended to your company and/or your peers. Get as educated as possible.
Line up your team:
When discussing governance in particular, IROs will likely need support from the general counsel/corporate secretary, the human resources leader, the CFO or a lead independent director.
Know who you are talking to:
A good stock watch and proxy solicitation firm are usually helpful for learning about how your investors usually vote. Meeting with your top 20 holders is approximately the right amount of outreach for engagement, but a shorter, more manageable target list is usually achievable once you omit investors that purely follow ISS or Glass Lewis for voting recommendations.
Clarify your objectives:
Educate the board beforehand on the process and obtain their full buy-in on the objectives and potential outcomes of these governance road shows.
Some objectives you may have are:
- Soliciting input from investors
- Hearing investor opinions
- Responding to prior criticism of your governance
- Building “just in case” relationships
- Heading off a future potential problem
Each situation will require a different approach.
Understand their bias:
Understand the extent to which each institution follows proxy advisor recommendations. Get to know their in-house policies, and whether they take a formulaic approach to voting or are open to receiving further information and input as a part of their decision-making process.
Research how each institution voted in the past:
Companies must evaluate their investors’ past track record of voting on key issues, which will be a strong indicator of their likely position on the same issues in the future and act as a guide for which investors to target for engagement depending on the issue to be discussed.
Follow an agenda:
Come prepared with an agenda to guide the discussion and to ensure proper focus on the most relevant topics and details. In addition to discussing voting criteria and gathering input, discuss views on emerging governance issues to help anticipate shifting voting patterns. Be prepared to answer questions.
Consider the timing:
Target proxy-voters in the off-season (fall and early winter) and recognize that they may still have difficulty securing a meeting given limited availability.
Companies are always looking for ways to avoid costly proxy battles with the emerging and emboldened army of activist investors that keep making the news. Governance roadshows are just one more tool for them and, when used properly, can garner favorable results.