Engagement evolves as investors target ESG

After coping with a typically stressful proxy season in 2017, directors and governance teams should be hearing voices. Those voices belong to their shareholders – in particular, newly focused and agenda-driven institutional investors. Although the changes in shareholder proposals and voting patterns may not be blockbuster-level dramatic in terms of numbers, there is a widespread acknowledgement that the voices are becoming louder, and that boards need to listen and respond. ‘Companies ignore engagement – particularly with key investors – at their own peril,’ warns Chris Ruggeri, national managing principal with Deloitte Risk and Financial Advisory.

Attention this year has been focused on climate change-related shareholder actions, but industry professionals say a range of ESG topics are coming onto the agenda and are only likely to feature more prominently in the future. There are, however, steps boards can take in an effort to pre-empt, prepare for or deal with such proposals, and there are signs that many are already responding with improved engagement.

The Manhattan Institute for Policy Research’s Proxy Monitor follows the 250 largest publicly traded companies by revenue. It finds that among the 225 companies that held AGMs in the first half of this year, the most common type of shareholder proposal involved environmental concerns. Fifty-four such proposals were filed, similar to last year’s tally but double the total filed five years ago. The second-most common type of shareholder proposal concerned political spending or lobbying (47), followed by proposals on having separate CEOs and chairs (26) and changes to voting rules (24).  

Average shareholder support for environmental proposals this year was 27 percent, up from 21 percent last year and 17 percent in 2015. More specifically, excitement over the pressing need for engagement was generated at a handful of AGMs where a majority of shareholders backed proposals pressing companies – ExxonMobil, PPL Corporation and Occidental Petroleum – to produce reports on how they will be affected by action taken to limit climate change.

Professionals agree that institutional investors, some of which have ramped up their corporate governance teams, are the driving force behind the uptick in attention to and support for ESG-related proposals.

The most high-profile example of this has been State Street Global Advisors (SSGA), which in March issued guidance to thousands of companies intended to increase the number of women on corporate boards – and famously had the Fearless Girl statue placed opposite the Charging Bull on Wall Street. In another example, BlackRock cites climate risk disclosure among engagement priorities for 2017-2018.  

Although these public stances apply pressure on companies to comply, industry professionals say it can also be helpful to have institutional investors be upfront about their intentions. Doug Stewart, vice president of securities and assistant secretary with Visa, tells Corporate Secretary that such policies provide some certainty and inform companies what the institutional investors want to discuss during engagement calls, enabling the issuer to involve the right members of staff. The only frustration would be if the policies change every few months, he adds.

PRE-EMPTION

One means of pre-empting a shareholder vote on an ESG-related topic is to increase the reporting a company makes to investors regarding the issue. Shearman & Sterling partner Stephen Giove tells Corporate Secretary that an analysis of whether to make disclosures has come into focus due to trends in shareholder voting and ESG proposals. That analysis entails considering the relevance to a company and its business model – and the materiality – of the issue and related information, he explains:

• If both relevant and material, the issue should be given appropriate prominence
• If it is relevant but not material, the company should consider what others –such as regulators – may think in terms of making voluntary disclosures
• If the issue is neither relevant nor material, the company should find a way to disclose and explain this to its shareholders.

Pre-emptive disclosure may not be enough, however: the boards of the companies that lost climate-change shareholder votes this year had argued that they already provided extensive reporting in the area. Giove describes the disclosure approach as ‘somewhat effective’, adding that its success depends on how good a story the company can tell.  

Stewart says part of his team’s work in the engagement field entails explaining to the board the trends in shareholder proposals and looking at areas where the company might face pressure. In Visa’s case, he says the company sought to pre-empt a proposal by releasing more information on its website about its lobbying activities – such as who carries out those efforts and how decisions are made. The company enhanced this reporting this year having noted the trend toward more political spending and lobbying proposals around the industry, Stewart adds.

EVOLVING ENGAGEMENT

Effective communications with shareholders can also help a company avoid a proposal, and professionals report that engagement tactics have been evolving over the last year or so in the face of increased pressure. Ruggeri notes that shareholder engagement is a means to build credibility with investors that will stand the company in good stead when there is a crisis.

An important trend in how firms have gone about this over the past year has been the increased frequency of directors’ involvement – mostly where there is a problem, professionals say. In normal situations, management still generally takes the lead when it comes to engagement, but directors are increasingly getting involved where the ‘stakes are highest’ and they can add the most value, Peter Kimball, head of advisory and client services at ISS Corporate Solutions, tells Corporate Secretary.

Stewart agrees, saying that, in terms of director involvement, ‘we have tended to keep our powder dry until [directors are] needed.’ Visa has not received many requests for non-CEO directors to participate in engagement, but Stewart says that may change next year. Kimball, who advises companies, says the chair of the relevant board committee is most typically the director who engages with shareholders where there is an issue – and it can take weeks to prepare a director and fully incorporate him or her into the engagement process, he adds. 

Another recent trend has been an increase in engagement outside of the main proxy season, professionals note. Michelle Edkins, managing director and global head of BlackRock’s investment stewardship team, tells Corporate Secretary this is helpful. ‘It means there isn’t this single focal point of getting through your shareholder meeting,’ she explains. ‘[There can be] a more wide-ranging conversation about governance at the company or trends we are seeing in the market as an investor, rather than just, Please vote for this proposal.’

Giove says that, over the past year, he has seen more frequent cases of boards adopting formal engagement policies, directors being trained in engagement by investor relations and legal, boards paying more attention to an individual’s engagement experience when recruiting directors and scripts being used in meetings where directors are involved.

If, despite such efforts, a company still faces a potential proposal, there is the option to negotiate: Stewart notes that Visa was able to negotiate away a planned proposal last year that sought management and employee diversity data by agreeing to release information on the topic.

If companies want to increase voting by retail investors – either because engagement fails and they want to build support against a proposal, or because they want to encourage more participation to boost brand awareness – they have tools to do so.

‘We’ve seen more than 200 companies use enhanced messages on their proxy materials to approach retail investors more effectively,’ Sharyn Bilenker, vice president of corporate affairs and strategic development at Broadridge Financial Solutions, tells Corporate Secretary. ‘We never would have seen that five years ago.’

One tactic is to make the envelopes containing proxy materials more engaging to encourage shareholders to open them, such as by having a ‘Your vote counts’ label on the packaging. These techniques can increase voting by 25 percent, Bilenker says.

LOOKING FORWARD TO 2018

The consensus among industry officials is that the trend toward more and better-supported ESG proposals – and the accompanying focus on better engagement – is only likely to continue and intensify into next year’s proxy season.

‘For me, 2016 was a turning point with regard to a focus on sustainability-related issues,’ Rakhi Kumar, managing director and head of ESG investments and asset stewardship at SSGA, tells Corporate Secretary. ‘The number of shareholder proposals on environmental and social issues was high and I said, This is it. This is going to be the new area of focus. And I think that is going to continue. Investors are going to bring sustainability issues into the boardroom and companies will be asked to provide more information – and better information – that is relevant to investors.’

‘What we anticipate is continued focus in a few key areas, the first being engagement,’ Glenn Booraem, principal and investment stewardship officer with Vanguard, tells Corporate Secretary (see Yes or no: What Vanguard looks for in proposals, page 30). ‘We continue to believe engagement is a significant part of our ability to both understand issues and articulate a point of view to companies, either through management or directly to the board. Though not always a voting matter, engagement is a very important channel for us.’

Areas that will continue to be significant engagement priorities and that have the potential for voting implications are the evaluation of climate risk and broader sustainability disclosures, Booraem says. ‘Another area that has had limited voting implications thus far that I think will continue to rise in prominence and importance is board diversity, particularly gender diversity,’ he adds. ‘It’s been a significant topic of engagement for us with many portfolio companies this year [and] we anticipate that will continue to be the case.’

‘With regard to diversity reporting, it’s not about diversity on the board, it’s about a pipeline, it’s about the culture, it’s about how you’re promoting diversity within your ranks,’ says Kumar. ‘Are you creating an environment where your employees of both genders thrive?

‘What we like companies to do is provide consistent reporting on diversity in their pipeline at each level of management, because that’s the way to get people to focus on the fact [for example] that, I had a huge drop from my [vice president] to [managing director] levels this year, or Why is it that my [vice president] level is 50 percent and then suddenly it’s going down to 10 percent?’

This article originally appeared in the Corporate Secretary special edition on shareholder engagement. Click here to view the full issue.