Most observers agree that the influence of shareholder advisory services (SASs), primarily ISS and Glass Lewis, is waning after years of exerting near Jedi mind control over their institutional shareholder subscribers. As companies have become more sophisticated and proactive in addressing SAS hot buttons through better proxy disclosures and key shareholder engagement, institutional shareholders have begun to realize that SAS methodologies are not infallible. And though SASs continue to significantly influence how investors vote and, correspondingly, how companies approach governance and compensation issues, they no longer call all the shots.
One way in which many companies are improving shareholder engagement is through governance road shows. While financial road shows designed to help analysts, key shareholders and rating agencies understand a company’s financial performance have been standard practice for many years, governance road shows have only recently become common.
In governance road shows, members of management meet with key shareholders and SASs to be sure they understand the company’s approach to governance policies and issues. Governance road shows also allow management to preview any issues that might be expected to arise in the upcoming proxy season (while always being sure not to disclose material non-public information). It is an excellent opportunity to “test the waters” regarding a concept the company is considering and attitudes about the company’s current governance practices.
Director road show participation…
More recently, directors have begun to participate in governance road shows. In the abstract, that makes sense because no one should be more informed about a board’s thinking on governance and executive compensation than the directors themselves. Certainly some investors have expressed a preference for one or more directors participating in the discussions.
I recommend including directors in governance road shows only in rare circumstances. For example, a company that is involved in a major executive compensation issue might want to include the head of its compensation committee. More generally, however, it seems unwise to include directors in this type of routine shareholder communication. Directors typically do not have the history or context of the company’s broader shareholder communication efforts. And while they may be outstanding as directors, many of them do not have a detailed grasp of all the issues and some may not be the greatest communicators. As a result, it can be difficult to predict how they may perform, no matter how much preparation you do. It’s better to let management do its job and then report back to the board, rather than enlisting director assistance, unless there are compelling reasons to do so.
A couple of additional thoughts…
- Governance road shows are more effective when conducted outside of the proxy season, when investors and SASs have more time to focus on your presentation. The fall is the best time since the calendar-year proxy season has not yet heated up, but will be soon enough for the meeting to remain fresh.
- Remember that institutional shareholders and SASs experience regular turnover in their decision-making personnel and changes to their internal policies. Therefore, it’s dangerous to ignore them because they seemed happy enough when you spoke to them a few years ago and they haven’t complained since. Regular meetings are important to maintaining the kind of communication flow and relationships that will accomplish your goals. Annually is about right.