For the last several years, Ipreo has hosted a panel discussion at the NIRI National Conference featuring a topic of interest – typically, we keep our ear to the ground for a subject that’s seeing increased interest in the IR community, then fit a panel of experts to the topic that can educate us on it.
For us, the clear choice this year was around governance and shareholder engagement. NIRI National recognized this need as well, creating a designated track of sessions at the conference around corporate governance, and we were glad to contribute.
Ipreo’s head of thought leadership and partnerships, Chris Taylor, moderated a panel dealing with each of the three constituents in the governance engagement process between the corporate and the buy-side:
- the IRO (Sally Curley from Cardinal Health, representing the ongoing investment decision relationship with the company);
- the legal team (Jack Adams from Cardinal Health, covering corporate secretary and legal professionals, as well as the directors involved in engagement), and;
- the investor’s voting decision-making team (Sarah Lang from Capital Group)
Here are a few things we learned from the discussion about the engagement process from the panel:
- Governance engagement is a year-round process these days. At Cardinal Health, Sally and Jack have a June 30 fiscal year end (with a November AGM), but reach out to investors in their “offseason” in February and/or June. For most calendar-year fiscal year companies, Sarah pointed out that September and October are the most active “engagement season,” but that she’ll speak with companies year round.
- Information about investor voting decisions is more accessible today than in the past, and can help inform the engagement process. Jack has found that some investors are very open about what voting decisions they’ve made and why, and he and Sally create a book each proxy season aggregating information from investors’ disclosed voting guidelines to help them in producing their materials, trying to match the “messages in last year’s voting” with the disclosures to support this year’s vote.
- The materials and preparation involved are an important part of engagement interactions, and help to keep the conversations focused on the right topics. Sally and Jack produce a governance presentation to send to the investor ahead of time, pointing out important topics and any items that have changed. On the receiving end, Sarah’s team keeps careful records of all prior interactions with the company and reviews them prior to each meeting, and appreciates a tight agenda that “avoids a retread of last year.”
- Engagement may not always be necessary for every combination of investor and issuer… Sarah noted that there are companies on both the good and bad sides of the spectrum where engagement may not be as valuable. “No call is necessary” can mean “everything is fine,” but there are some cases where the investor and issuer will have to “agree to disagree” on some issues, and unless there’s new information, direct engagement may not be as valuable either.
- …but engagement is important if there was shareholder concern on last year’s proxy. Sarah sees the shareholder engagement disclosures in the proxy statement (generally showing the company’s history of speaking with top X shareholders or Y% of shares outstanding) as especially valuable if the company had a low say-on-pay vote, or received high support for an outside shareholder proposal. Companies that disclose what they heard from shareholders during that process, and what changes they’re making if any, may be noticed, and lack of disclosure following an adverse vote may stand out as well.
- Directors occasionally join the engagement process, but not always. Jack noted that Cardinal Health’s lead independent director does a few meetings a year with investors, but that’s usually to discuss specific board structure items that fall into the lead director category (director evaluation, board refreshment). Jack and Sally mentioned that their lead independent director also sits with Sally in investor meetings at a major healthcare investor conference, so he receives unfiltered input annually to supplement the ongoing briefings he gets from IR and Legal. Sarah’s team is used to having directors involved (this has been common practice in Europe for years), but mentioned that the lead director isn’t always the right person for the issuer to have on the call; depending on the agenda, someone else may be a better contact.
- Investment analysts are becoming more involved in the voting process. Sally suggested that there’s “a growing minority” of buy-side analysts and portfolio managers in her shareholder base that will involve themselves in voting decisions. This approach is part and parcel of the way Capital Group operates. The investment analysts around each position are an important part of the voting research process; pre-proxy season Sarah will have consistent communication to show the analysts what their positions look like from a governance standpoint, and the investment analysts lead in producing the initial voting recommendations.
- Conversely, governance and ESG are becoming more important inputs in the investment process. Sally also noted that she’s interacted with certain overseas investors that have a mandate from their institutional clients that a percentage of any interaction with an issuer is spent on reviewing ESG issues, which includes corporate governance.
- Proxy advisory firms are seeking to communicate more with issuers. The panel was met by a “surprise guest” in the audience, Aaron Bertinetti from Glass Lewis, and Aaron got the opportunity to talk about how his firm sees interactions with companies. Aaron mentioned that early on in his career at Glass Lewis he was told not to engage with issuers. Today, he leads this engagement process for GL, and is actively working to make the inputs to his team’s research more transparent and allow factual issuer input. Sarah’s team at Capital subscribes to both ISS and Glass Lewis research (as well as other proxy advisors overseas), but do not follow their recommendations; all proxy voting decisions are made by the in-house investment team guided by Capital guidelines and the recommendation of the analyst. Advisory firms are just pieces of the puzzle, and certainly don’t take the place of information coming directly from the company.
- If it’s your first time, reach out. Engagement is a new process for many issuers, and Sarah pointed out that the first-time call with a company may be the most valuable; her team may prioritize some of these calls over those where they’re already aware of the company and there are no major issues outstanding.