I was having coffee with a newly-minted CFO a few months ago, when he asked, “Our advisors are telling me we need to target passive investors. What do you think about that? How would we even do that?”
I had one of those “Say what?!!” moments. Target passive investors? Either you’re in or you’re out (of an index). But then I realized who he had been talking to and why.
So, I explained, “A company of your size and industry is going to have passive investors regardless. This is good. They form your core shareholder base and don’t take up a lot of your time or call often.”
“However, as essentially permanent investors, they expect boards to actively represent their best interests. That’s why they place such heavy emphasis on board composition and governance practices.”
I advised him to talk with his general counsel about implementing a governance outreach strategy. With passive investors typically owning (and voting) 25% to 35% of a public company’s outstanding shares, this is increasingly considered a best practice.
Now governance outreach does not have to be a massive undertaking (in non-crisis situations). The first step is knowing the strengths and weaknesses of your company’s governance principles and practices. You should also be familiar with the governance priorities of your company’s major investors – many of whom make this information publicly available. Also, it can be helpful to review the major proxy advisory firms’ guidelines to get a broad sense of key benchmarks, but remember the largest investors have their own independent guidelines and can be influenced.
Next, during the off-season initiate brief introductory calls, establishing points of contact and understanding of investors’ approach and priorities. Depending on tone of such calls, you can evaluate if offering certain investors meetings or calls with directors is appropriate. Another option to consider is to ask portfolio managers or analysts at targeted firms to invite their governance contact to attend non-deal roadshow meetings with your CEO. This is something I did with good effect when leading an outreach campaign several years ago.
Another opportunity to build relationships with governance professionals is to attend the Council of Institutional Investors (CII) conferences. This will give you the opportunity meet with and understand investor perspectives in a more neutral environment.
These basic steps can create a strong foundation if you’re ever in need of a full-court-press on governance matters. To prioritize your efforts, evaluate your shareholder base in view of the matters at hand, your governance strengths and weaknesses, the quality of your investor relationships and the support you need, then schedule meetings accordingly. Directors, particularly the lead independent director and relevant committee leaders, should be prepped for these discussions.
When it comes to governance outreach, don’t pass the buck. In my view, Investor Relations is best positioned to provide context around investor perceptions and behavior and “owns” the investor relationship. Such insights can help secure the space for boards and management teams to execute their strategies.
Lead-IR Advisors, Inc.