With the shareholder meeting season rapidly approaching it is important for companies to be aware of the shifts in corporate governance trends. To that end, companies need to know not only which institutional investors own their stock but also how they behave. For example, do they outsource their voting decisions or are decisions made internally? And if decisions are made in house, which teams own or participate in the voting decision — the investment team or the stewardship team?
Also, to muddy the waters even more, institutions may have loaned their stock out thereby reducing their votable share position on a given date. The effects of institutional investors loaning stock to short sellers are an often-overlooked analysis, especially for companies with large short positions in their stock.
To provide an accurate roadmap, I’ve outlined five key considerations a company must undertake before finalizing their proxy statement.
Analyze your shareholder base
All companies should conduct a regular analysis of their shareholder profile to better understand the institutional and retail shareholders holding their stock. In today’s business environment, companies need to know on a regular basis who owns their stock. Understanding the voting policies and trends of their investors and how best to engage directly with each of those shareholder constituencies is critical. A shareholder profile analysis is the key to accurately understanding who owns your stock.
Once you know who the true institutional shareholders are, your proxy solicitor will help you understand the level of influence the proxy advisory firms — ISS and Glass Lewis — have on your shareholder base and alongside those investors that maintain their own, independent voting policies. This knowledge allows you to determine where to focus your efforts: for example, if someone strictly adheres to ISS, you may decide it is not worth trying to engage with that investor.
You can also determine if the voting decisions are made by the investment team, the stewardship team or a combination of the two. In the event of a negative voting recommendation or vote, knowing the right group to target to try and override that voting opposition is critical. In many cases your ongoing investor relations relationship can be invaluable, particularly around compensation or corporate action-related proposals.
Conduct a stock loan analysis
In today’s market of diminishing management fees and intensifying competition, asset managers are placing greater emphasis on identifying alternative sources of revenue. Securities lending has emerged as a key driver, enhancing overall investment advisory and administrative fee income.
Every company should conduct a stock loan analysis to identify the top institutions lending out shares and assess how this impacts the votable share positions ahead of their annual shareholder meeting. This analysis helps ensure accurate understanding of voting dynamics and highlights any potential reductions in voting power caused by this practice.
For example, a large institution like Vanguard or Blackrock might report a significant stake in your company’s stock. However, since they both actively engage in securities lending, a portion of those shares could be out on loan and are not eligible to vote. This effectively reduces the voting power of that institution on its reported position. This can negatively affect a proxy solicitation campaign, as the anticipated number of votes may be significantly reduced, requiring efforts to secure additional votes from other investors. To be effective, this type of analysis should be done on a regular basis and well prior to a meeting’s record date.
Check whether a director may be vulnerable to a negative vote
Conduct a review of your institutional investor’s voting guidelines to determine if a director nominee will run afoul on issues such as gender diversity, being over-boarded or lacking sufficient disclosure. By doing so, you will help mitigate potential surprises well before the voting starts. It will also give you the opportunity to inform your board about any potential concerns. In addition to proxy policy votes against directors, many shareholders are increasingly using an against vote on directors to affect change.
Communication is key. Companies who regularly engage with their investors are ultimately the most successful at preventing or navigating voting opposition to their directors and other important ballot items.
Do your homework
If you are presenting a new equity plan or amending an existing plan, you should do your homework well in advance of filing the proxy statement. In addition to your shareholder analysis, review the factors that shareholders and the proxy advisory firms use to evaluate equity plans such as burn rate and overall voting power dilution. It is important to compare these factors to the voting policies of your top investors and the proxy advisory firms.
In addition to more quantitative metrics, investors also look at a plan’s qualitative features. For example, is the plan broad-based or does the plan have an evergreen provision? Provide a narrative around the why your compensation programs are effective and work well at your company to enhance shareholder value. In addition, include context around the business strategy and how your compensation programs drive the company forward. This will help you maximize the chances of a successful voting outcome.
Don’t forget your retail investors
Even if retail investors do not represent a sizable percentage of your shareholder base, they can be a source of voting support when you’re faced with a challenging vote. Our experience shows that in a close vote, retail shareholders who have been solicited by a proxy solicitor will be the difference maker that pushes a proposal over the finish line.
It would not be unusual to see a 10 percent against vote on a controversial proposal. To overcome that 10 percent, you would need about 30 percent (3 to 1 ratio) of the outstanding shares represented in registered and NOBO shares to bridge the gap. When solicited by a proxy solicitation agent, retail votes generally come in supporting management at a 9 to 1 ratio.
In the end shareholder meetings are no longer a routine, three-month event. Companies need to prepare well in advance with their proxy solicitor to ensure proper shareholder engagement and shareowner analysis campaigns have been conducted.
With the help of a proxy solicitor, it is possible for companies to know who their shareholders are, understand their voting patterns, and correctly forecast the voting outcome before the proxy statement is even released.
Peter Casey is chief operating officer, US at Alliance Advisors, where he oversees the proxy solicitation group and proxy contest/M&A practice
