Board Members Can’t Afford to Pass on Off-Season Engagement

While many executives are comfortable with off-season shareholder engagement, board-level participation in these meetings is another story. Companies often struggle to get their board members involved even though it has long been considered best practice for directors to have a seat at the table in these off-season conversations. After all, oversight is the primary job of directors, and they are the ones shareholders will hold to account for any failure of governance.

Now, the stakes are higher than ever. Despite more challenges from attorneys general on ESG and the SEC introducing new ESG fund rules, investors continue to focus heavily on ESG topics (governance issues in particular), and more than two-thirds of all funds have ESG stewardship statements. Instead of relaxing expectations around governance, ratings agencies and top passive institutions are getting stricter on topics including board diversity, overboarding, and say on pay.

At the same time, institutions, and large institutions especially, continue to signal heightened interest in these topics. Support for shareholder proposals around niche ESG topics is increasing. Say on pay votes are passing by higher margins. And more and more institutions are using annual voting to voice their displeasure with corporate boards that aren’t putting these measures on the ballot. As just one example, Vanguard has publicly declared its stance on the issue:

“When a board fails to respond to a proposal supported by a majority of its voting shareholders and the Vanguard-advised funds supported the proposal, the funds will generally vote against relevant members of the board. For example, concerns with compensation matters would likely impact votes on members of the compensation committee, while governance concerns would generally impact votes on members of the nominating/governance committee. A pattern of unresponsiveness to shareholder feedback (e.g., a failure to act, or slow action, on shareholder votes) may be an indicator of poor governance practices and may result in increasing levels of opposition to board members’ election.”

All these trends are slowly but surely eroding support for incumbent board members. And directors who fail to proactively engage with shareholders could be doing so at their own peril.

Put a board member off-season engagement plan into place

The term off-season is used to describe the period between summer and late winter, starting immediately after most public companies hold their annual meetings of shareholders. Companies and board members can get ahead of the issues by proactively and strategically increasing board member participation in off-season engagements. Here are a few actions to take:

1. Know when off-season board member participation is a must. While involving board members in off-season meetings is always best practice, there are several situations where their attendance is essential. If the company has been lax in responding to a passed say on pay vote, or if management is frontrunning issues that will come up on the following year’s vote— compensation, a board member election/re-election that might need explaining, or an anticipated shareholder proposal, for example—then board members definitely need to be present. Companies in the middle of longer-term changes to board practices or a board refresh that won’t necessarily be evident this year should also include board representation in these meetings.
2. Offer up the opportunity. Offer a meeting with board members to all significant shareholders and to any holder that requests a meeting. Virtual meetings are just fine. The important thing is to have board members actively participate in the conversation.
3. Listen actively and be open to change. Allow shareholders to drive the agenda. Investors want to know that their views are being taken seriously and that the board is open to change, not asleep at the wheel or willfully blind to potential alternatives. Adopting an open-minded, listening based approach can help fight investor perception of an entrenched board. It also allows companies to better understand where they are falling short in their shareholders’ eyes. Ask for unvarnished shareholder feedback on what the board and executives are doing right and wrong and offer specifics on how management intends to address concerns. In addition, take the opportunity to ask about emerging topics so the company and its board can better prepare for future conversations and engagement.
4. Have talking points ready to go. While shareholders can and should take the lead in these meetings, companies need to get their messaging across, too, highlighting important actions that have already been taken or are in the works.

• Start by very concisely articulating the company’s strategy for value creation. If stock performance is great, talk to the company’s historic efforts. If it is not, outline the action plan in place to increase shareholder value in the near term and long term.
• Address additional opportunities the company is considering to boost shareholder value including M&A, share repurchase, and exiting unprofitable businesses.
• Thoughtfully explain the rationale for the company’s strategy, asset portfolio, and business mix, particularly in areas where investors are split or where sell-side research needs to be addressed or refuted. Board members and management need to ensure investors understand why decisions are being made (or not made) around these issues.
• Shareholders will inevitably ask about executive compensation. They expect evidence of a strong link between pay and performance. Directors, especially members of the Compensation Committee, should be prepared to articulate the company’s approach and how remuneration reflects value creation at their companies.
• Share highlights from recent materiality assessments and perception studies to reinforce how management and the board are setting priorities based on investor input.
• Offer a one-pager to summarize and reinforce messaging points and highlight recent efforts.

Proactively enhance governance practices

Including board members in off-season engagements will go a long way toward delivering the message of an engaged and proactive board. Companies can take things a step further by demonstrating clear leadership in governance. This is particularly important when share price performance is volatile or weak. While governance is almost never the central feature of an activism campaign, it is frequently used by activists as a wedge issue to paint a board of directors as entrenched and out of touch. Get ahead of the threat by making continuous improvement in governance an obvious effort.

Start by regularly evaluating governance practices with an eye toward proactive measures the company can take to demonstrate its deliberate approach to best-in-class governance. Some opportunities include adopting majority voting in director elections or eliminating supermajority vote provisions. In appropriate circumstances, companies can even consider voluntary declassification of the board.

Whatever actions a company takes or doesn’t take, it’s important to continuously discuss the board’s focus on composition and refreshment. A robust approach in this area has become table stakes for the most sophisticated companies when it comes to engagement and garnering ongoing support from shareholders. Institutional shareholders appreciate seeing changes in board composition and view a regular cadence of new directors joining a board as evidence of a healthy boardroom dynamic. Specifically, investors want to see new board expertise in sustainability and cybersecurity.

Boards lacking in these areas or that have other questionable governance practices should be aware that these are weaknesses an activist might seek to exploit. Proactively addressing the rationale behind governance practices or speaking to plans to change them over time is critical, particularly at companies that have seen a recent erosion in investor support for directors.

Be prepared to play the long game

Off-season shareholder engagement is best viewed as an ongoing effort to build long-term support for board members, not to ward off a shareholder proposal in the moment. Any company that has engaged in last minute efforts to convince shareholders to support a proposal knows how much it helps to reference past conversations and build off established relationships. Indeed, years of thoughtful evolution can reassure shareholders that the board prioritizes good governance and has sufficient internal will to make changes when warranted. More importantly, it shows that board members are in tune with stakeholders’ points of view at all times, and not just at crunch time. And it can prevent no-vote surprises in future elections because board members will have first-hand insight into what their stakeholders think.

Need help with off-season engagement and more fully involving the board in investor relations? Connect with the strategic communications experts at Riveron. From working with the board on messaging to putting the engagement game plan into play, we can support you and your board in using the off-season to your greatest advantage.