Shareholder engagement is a key tool in a board’s toolkit to prepare for and respond to potential activist investor campaigns. A shareholder engagement program can provide valuable information on investor opinion, allow the board to head off issues before they become the subject of an activist campaign, and cement the support of important long-term investors.
Based on dialogue with institutional investors, investor associations and advisors, the EY Center for Board Matters reports that most investors believe that whether activism is beneficial over the long term depends on the particular circumstances. Many investors stressed that in an activist situation, they talk to both sides – the activist and the company – before they develop their views.
A board that is already engaged in a conversation with its key shareholders before an activist arrives is in a strong position to convince them that the board is the better steward of their interests. By contrast, a board should expect that when they get a call from an activist, the activist has already reached out to their major shareholders. If the board is not already engaged in dialogue with those shareholders, it will begin the campaign at a disadvantage.
- When company and long-term shareholder views are aligned, those shareholders can be powerful allies for the company, including by actively reaching out to other shareholders to argue in support of management’s position.
- Investors consider the company’s track record of responsiveness to their concerns when considering where to put their support. A company that is perceived to be interested in investor concerns only when it is faced with an activist challenge loses credibility.
- Shareholder engagement is also an opportunity to engage dissatisfied shareholders and the activists themselves. Engagement with activists is expected by investors, and allows the company to consider the activists’ credibility and appeal, as well as the merit of their ideas, and to formulate a considered response.
A company’s proxy communications are a key piece of its shareholder engagement program, and can provide a foundation for more substantive engagement conversations. The EY Center for Board Matters spoke to investor groups about what they find valuable in disclosure communications.
- Top areas where investors want to see more disclosure are board composition and refreshment, including director diversity and recruitment processes, and executive compensation.
- Clarity and conciseness is important. Graphics, tables and hyperlinks allow comprehensive information to be conveyed in a more succinct and comprehensible manner, while extensive boilerplate, legalese and repetition tend to obscure company messaging.
- Investors would like to see engagement disclosures discuss shareholder concerns, unusual governance circumstances or challenges, as well as the company’s response and the rationale behind any changes made or not made.
- A letter to shareholders from an independent chair, lead director, committee chair or the board as a whole can be a valuable vehicle for explaining the board’s reasoning on governance decisions.
A strong shareholder engagement program provides an opportunity to build relationships, demonstrate responsiveness, and gain insight into investors’ evolving governance views. By remaining engaged with its investors, a company can address issues and bring important investors onside long before an activist arrives on the scene.