Maximizing Board-Shareholder Engagement

Best practices in investor communication usually start with the corporate leaders and evolve into a standard for the rest of Corporate America, and that certainly seems to be the case with Board shareholder engagement. While large cap companies have had robust shareholder engagement programs for years, many small and midcap companies are just getting started. Investors now expect companies of all sizes to have a clear process in place to facilitate shareholder engagement with executive management and the Board.

In recent years, large institutional investment managers have expanded their stewardship and voting teams and become more efficient by leveraging technology. Now they are able to engage with a far larger universe of their holdings including mid, small, and even micro-cap companies. As such, investors expect companies of all sizes to have a clear process in place to facilitate shareholder engagement with executive management as well as members of the Board and to be prepared for in-bound inquiries.

How Distinct Types of Investment Managers Approach Investor Communications

An important first step is understanding how distinct types of investment managers approach this process, which will inform the nature of these conversations. There are three categories to consider:

Large Passive Investors

First are large passive investors like BlackRock, State Street and Vanguard that primarily manage index funds. Taken together, these investors own a large percentage of the average public company’s shares, which can make or break a proxy vote. It is best to think of them as passive investors but active voters.

These firms do not have portfolio managers, who typically engage with management, so engagement meetings are held with their proxy voting and investment stewardship teams. As index investors, these firms are long-term holders. Since they can’t “talk with their feet,” they are focused on strategy, long-term risks and opportunities, and governance that supports sustainable business performance over a very long time.

Large Actively Managed Investors

Second there are large actively managed institutional investors like Fidelity, Wellington and T. Rowe Price, which have buy-side analysts and portfolio managers who communicate regularly with management teams and investor relations professionals on earnings calls and in investor meetings.

These firms have separate stewardship and proxy voting teams that may or may not collaborate with portfolio managers on proxy voting decisions, so engagement meetings could be with the stewardship team exclusively or both the portfolio managers and the stewardship team.

Small Investment Managers

Third are small investment managers where the portfolio manager is responsible for both investing and proxy voting.

Understanding the Benefits of Board Shareholder Engagement

Both passive and active investors believe good governance leads to enhanced returns and they want to make informed voting decisions on director elections, executive compensation, M&A transactions, and other issues by engaging with management and the Board.

Those responsible for voting the proxy view these meetings as an opportunity to express concerns directly, get questions answered, learn about the Board’s oversight process, gain insight into the company’s long-term strategic plan and to discuss specific topics that provide a broader perspective on the drivers of sustained growth, returns and value creation, and the associated risks. These topics are far ranging and may include Board composition and refreshment, human capital management, executive compensation, climate issues, and many others.

From a company’s perspective, the benefits of engagement include the opportunity to build relationships and trust with important stakeholders – large shareholders who can determine the outcome of a shareholder vote and the future direction of the company. It also allows the company to hear directly from shareholders about their priorities and concerns, which can be valuable input to address in future messaging. In some cases, the outcome may be as simple as building relationships with shareholders, hearing their views on governance practices or proxy disclosure and building future goodwill. In others, it can be an important opportunity to get an early read on potential problems.

Practical Tips for Creating an Effective Board Shareholder Engagement Program

Do Your Research

If you are just embarking on a Board shareholder engagement program, it’s worth doing some research. The largest institutional investors (BlackRock, State Street, Vanguard) and many others publish extensive and helpful information online about their investment stewardship programs and guidelines, including the topics they care about, the questions they are likely to ask, and the rules of engagement (who should be in the meetings, how you can submit background information ahead of the meeting, etc.). A review of these guidelines can help companies make an educated guess about the key topics or issues that might be raised in meetings and prepare for anticipated Q&A.

Large institutions like BlackRock announce their engagement priorities every year and publish a list of companies they have engaged with and the topics covered. In 2024, these included Board quality and effectiveness, strategy, purpose and financial resilience, incentives aligned with financial value creation, climate and natural capital, and company impacts on people.

It's also worth reviewing proxies published by your peers and sector leaders to get a sense for topics that might be of interest - Board composition, Board skills and diversity, Board evaluations, succession planning, human capital management, and emissions reductions targets.

Assemble the Engagement Team

Many companies create a dedicated Board shareholder engagement team, making the process more seamless and effective as a consistent group works together over time. Members can include the lead independent director, the CEO, the Head of IR, legal counsel, and corporate secretary. The lead independent director and the CEO serve as key spokespersons at meetings and other executives support the process. Directors who have experience interacting with Wall Street and are familiar with the topics germane to investors can be valuable to the process.

Determine the Target Audience

Start by identifying the right individuals at your top twenty-five active and passive investors and finding their contact information. Once your program is up and running, you can add smaller investors without much additional time or effort. In contrast to active fund managers, stewardship professionals have diverse backgrounds including governance, ESG, legal, investment, research, corporate governance advisory and regulatory experience.

Mark Your Calendar to Hold Meetings in Off-Proxy Season Months (September – December)

Most companies are naturally focused on shareholder engagement in the months leading up to the annual meeting as they want to get out ahead of any potential proxy voting issues. Unfortunately, this is the busiest time of the year for proxy voters who are tasked with reviewing and voting on thousands of proxies in a very tight timeframe while also managing many last-minute requests for meetings from companies that have issues. At the height of proxy voting season, investors are likely to decline a meeting unless there is a specific proposal or negative proxy advisor recommendation they want to discuss with you before the vote.

It's important to remember that there are thousands of publicly traded companies and not all proxy voters have time to meet with every company. Even if an investor doesn’t respond to your proactive outreach, they will appreciate the effort – all part of the relationship building process.

Prepare the Right Content

Stewardship teams and proxy voters are not interested in your standard investor relations presentation, last quarter’s results or your latest product launch. Instead, they are interested in risks and opportunities associated with sustainable business practices that create long-term value.

As such, the proxy is the main source of information for meetings with these investors. Executives and directors who are involved in the process should be knowledgeable about the contents of the proxy and familiar with current and past voting issues and changes that were implemented following proxy voting outcomes.

Some companies are creating specific investor presentations for meetings with stewardship teams and proxy voters. For example, Pacific Premier Bank publishes a Strategy and Governance Update presentation. This is a terrific way to make a strong first impression by delivering a presentation that acknowledges your understanding of what this audience cares about, proactively addresses any vulnerabilities you are aware of and control your message.

Leverage Investor Relations as a Key Resource

IR plays a key role in the process and can take the lead in determining the right investors to meet with, briefing the Board and executives on investor issues or concerns, and crafting messaging, communications materials and Q&A. IR can also help the engagement team prepare for meetings providing briefing documents, rehearsing presentations and Q&A as well as conducting Reg FD training, as needed.

Since nothing can derail an investor meeting more quickly than a lack of preparation, it’s worth taking the time to conduct a dry run even if you think you are prepared. Assign roles and responsibilities to meeting participants. Remember investors are looking for a team that is prepared, organized and presents well together – where everyone knows their role and is in command of their content. Discuss ahead of time what will and will not be discussed.

Establish a Process for Follow-up

What happens after the meetings is especially important to building strong relationships. The first step is to follow up on specific requests from investors and to summarize and discuss the meetings with the Board to make sure the broader group is informed. It’s also important to keep a log of investor interactions including key issues raised and questions asked to refer to in preparing for future calls and meetings.

Include Disclosure on Your Shareholder Engagement Program in Your Proxy

Once you launch a Board shareholder engagement program, institutional investors will expect you to begin reporting on it in your proxy. Many companies report on the number of meetings they held during the year and include summaries of ‘what we heard’ and shareholder feedback received over the course of the year along with their responses in the proxy. Investors appreciate this – it tells them their input matters and the time they spent with you was meaningful rather than just a check-the-box activity. All of this helps build credibility and trust with your entire shareholder base.

A notable example of this type of reporting is in McKesson’s 2024 proxy statement (see Letter from Independent Chair, pages 1-2, and Shareholder Engagement summary on page 37), which captures the spirit and value of proactive shareholder engagement.

With the massive shift to and growing demand from institutional investors for shareholder engagement, proxies have evolved significantly to become an important disclosure document for investors of all types. DFIN’s Guide to Proxy Best Practices is an outstanding resource for any company looking for best-in-class proxy communication.

While starting any new initiative can be daunting, from an investor relations standpoint, a shareholder engagement program has a real and potentially critical ROI. With all the extra resources major investment managers – both passive and active – have committed to their fiduciary responsibilities, any company of any size can hit their radar screen. Being proactive rather than reactive has many benefits. We encourage you to reach out to Financial Profiles if you have questions or want help in creating a best-in-class Board shareholder engagement program.