Rob Swystun, Pristine Advisers
Companies should always be striving to communicate better with stakeholders. In order to do that, they must ascertain what areas of disclosure they can improve.
Proxy reports are one area that can always be improved, as they are probably the main avenue that companies use for relaying useful information to stakeholders. Ernst & Young LLP’s EY Center for Board Matters recently published a paper after talking with institutional investors, board members, corporate secretaries and advisors that details what areas of disclosure these stakeholders want to see improvements in.
Taking top spot in the area of what investors and other stakeholders want to see made clearer in proxy statements is board composition and refreshment. Specifically, they wanted to see issues of director diversity addressed and have a clearer picture of the director recruitment process.
If there is one word that investors want companies to familiarize themselves with, it seems to be; ‘succinct’. As is the norm with business communication (or, business obfuscation, if you will), excessive use of boilerplate text, mind-numbing legalese and too much redundancy makes many a proxy statement difficult to get through. In addition to these annoyances, dense and complex discussions and analysis on compensation are also not appreciated.
Investors would like to see companies use more graphics, tables, charts and hyperlinks to better share information and make it easier to comprehend. These tools also help companies be more concise in their proxy statements.
Letters directly from the chair, lead directors or the board in full are appreciated and can be useful for communicating specific governance challenges and developments. Furthermore, they can demonstrate independent board leadership and leading governance practices on the board.
Making engagement disclosures valuable for investors
A lot of investors said they don’t bother paying attention (at least not close attention) to disclosures about company-shareholder engagement unless there is a major issue involved like something related to a say-on-pay vote. Some investors told the EY Center for Board Matters that they think the disclosures are largely for the benefit of proxy advisory firms, which take investor engagement into account when they make their recommendations.
The EY Center for Board Matters’ paper had some recommendations for enhancing engagement disclosures and making them more relevant.
Discuss concerns that are specifically raised by shareholders and clearly outline the company’s response to those concerns, including any changes made as a result of them. Also, include the rationale behind why the board made the changes and why they believe those changes are in the company’s best interest.
Show the Process
Investors want to know the process of how information from investor engagement efforts is relayed to the board. They also want to know the company representatives who participated. In particular, they want to know if any directors were involved.
And, they want to know the methodology behind the investor outreach. Numbers like how many shareholders participated and information like what kind of shareholders participated (like were only the long-term investors targeted or only the top 25 shareholders targeted) are important.
Five Ways to Make Shareholder Engagement Better
The EY Center for Board Matters suggests the following five ways companies can improve communication:
- Clearly explain the rationale behind board and management decisions in the proxy report. Discuss unusual governance circumstances or challenges. Address controversies in relevant committee reports.
- Avoid boilerplate text, legalese and repetition in the proxy report.
- Use graphics, charts, tables and hyperlinks in the proxy report to make information easier to digest and easy to find. The proxy report can use hyperlinks to jump to other areas of the report or to outside information where necessary.
- Include a letter to shareholders with the proxy report from the independent chairman, lead director, a particular committee chair or the board as a whole to explain the board’s reasoning on governance decisions and developments.
- Include a summary at the end of engagement discussions to help ensure that shareholder and company views are aligned when engagement concludes.
As the EY Center concludes, the proxy statement is usually the main communication document from a company that institutional investors rely on when evaluating corporate governance and making proxy voting decisions. These documents shouldn’t be dry, dense slabs of mind-numbing information that is all but impossible to digest. They should be an extension of their shareholder engagement efforts that put investors in a better position to support the board and management and provide a foundation for more substantive and efficient engagement.