Don’t Pass(ive) The Buck

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.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

Virtual Meeting Reality

It was inevitable.  Whether its a routine and recurring process or an opportunity to interact or engage, technology can offer a solution.  That’s exactly what’s happening with corporate annual meetings.  In July 2018, Broadridge reported that it hosted 212 virtual annual meeting in the first half 2018, up 18% from the same period in 2017.  Virtual annual meetings can reduce costs and expand shareholder access.  No wonder more companies are doing them.

Yet, this growth has some large institutions and their advisors wringing their hands that investors will lose a key opportunity to directly engage with boards and management teams if annual meetings go virtual.  I also suspect some institutions worry boards may become less accountable to shareholders if not forced to look them in the eye.

As previously discussed, I believe this is really a question of form over substance.  Annual meetings are a formality; the end of a process.  The real substance of the matter is shareholder engagement.  Managements and boards should understand investor perspectives and engage with them on issues meaningful to shareholder value.  Today, investors have many tools to engage with companies beyond the annual meeting.

Nevertheless, I believe annual meetings – live, virtual or hybrid – should be conducted in a manner respectful of investors’ position as part owner.  To that end, a committee of institutional investors, public company representatives and advisors have developed some basic principles and best practices for virtual annual meetings[1], which are generally reasonable.  virtual annual meeting 3Not surprisingly, the committee places heavy emphasis on ensuring shareholders participating virtually have the same opportunities to present proposals, ask questions or make a statement as they would at a live meeting.  The committee fairly notes this objective should be a determinant of how the meeting is conducted and what technologies are used.

I further agree with the committee that boards should thoroughly weigh the pros and cons of a virtual meeting in view of their shareholders’ sentiment toward such meetings (some have strong opinions which may affect the proxy vote), the issues to be voted upon (is it a routine meeting or are there controversial proposals) and other potential issues of concern.  Boards should explain their rationale for the meeting format and communicate formal rules of conduct for the meeting, including outlining the Q&A process such as when questions will be accepted, and the time allotted in total as well as per shareholder.

I have a more skeptical view of the committee’s suggestion that companies consider making an archived replay of the meeting available.  By their very nature virtual meetings are more accessible and snippets may go viral, potentially giving dissidents a larger platform to voice their agenda.  Given that annual meetings are a formality and no news is typically announced, why take that risk?

The reality is the use of virtual annual meetings will continue to grow.  In this brave new world, companies need to ensure the technology and format provides for a fair and equitable process, while investors need to recognize that engagement is not an annual event linked solely to the proxy.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

Enjoy these posts?  Sign up to receive them via email
and like them on LinkedIn or Twitter.

Join NIRI-Chicago at its annual Investor Relations Workshop – September 28, 2018
Print

[1] Principles and Best Practices for Virtual Annual Shareowner Meetings, The Best Practices Committee For Shareowner Participation In Virtual Annual Meetings, May 2018