Are shareholder resolutions really getting better? The view from the proxy solicitor (Part 2)

This is the second of a two-part look at corporate engagement from the proxy solicitation point of view.

So is the typical reaction of the corporation not necessarily to go straight for proxy solicitation but to engage with the proponent, and then with their larger shareholders, to talk to them about whether they think that they are going to support the resolution? “We think of shareholder engagement as part of the proxy solicitation process,” said Meyer. “It can happen off-season, it can happen during the season. But most times before they have filed their proxy statement, companies have tried to engage with the shareholder proponent to see if there’s a way that they can negotiate it out or have explored excluding the proposal under the SEC’s Rule 14a-8 no-action process. Companies generally don’t like shareholder proposals, period. So they’ll often try to get out what they can get out; and generally not for nefarious reasons. If a shareholder proposal is included in the proxy statement, then the company will try to understand how at risk it is; if both ISS and Glass Lewis recommend against a shareholder proposal then the company is often in pretty good shape with respect to the shareholder vote. However, even then the company will probably have certain shareholders that they want to reach out to and ask whether there is any more information they need, and explain to the shareholder why the company is opposing the resolution. If the company is concerned about the outcome of a vote, they will often be more pro-active in trying to set up meetings with large investors, for example the top 25-50 holders, to discuss the proposal. If there is important information that the company wants to convey that has not been included or highlighted in the proxy statement, companies will often put together supplemental proxy materials and file these with the SEC, to further explain the issue to all investors and ensure they are not making selective disclosure. This action can be associated with any kind of proposal whether it’s a management Say on Pay proposal or a proposal on ESG matters.”

I recalled the retail proxy solicitation campaign at Bank of America on the proposal to split the chair and CEO positions. I asked whether such widespread campaigns were unusual? “Larger companies usually get down to the nitty-gritty of a retail call campaign on a shareholder proposal if the topic is one that management feels really strongly about and they want management support to be as high as possible. Certainly the CEO/chair split,” she continued “is one of those, and most companies feel that it really should be in a board’s purview to determine the best leadership structure.”So in that instance, companies would not wait for recommendations from proxy advisors, who often tend not to support split CEO/chair proposals? “No, companies would be well prepared ahead of time, with a definite list of who they want to talk to and perhaps supplemental materials. Because once the proxy statement is filed, the company may have a hard time getting hold of investors until the ISS and Glass recommendations come out, and engagement is then squeezed into a one- or two-week window before the company’s meeting.

“Many companies will actively solicit proxies for every annual meeting, they want a strong quorum and they want us to reach as many constituents as possible. We work closely with companies to determine the proxy solicitiation and shareholder engagement approach that will be most likely to get management the best outcome given a number of factors, including the composition of the company’s shareholder base, the voting history and voting guidelines of their largest investors, the policies and recommendations of proxy advisory firms, the company’s history of engagement and responsiveness and the proposals to be voted on at the meeting.”

It seemed that the whole process can last from the Autumn, which is when most proposals get filed, right through to the day before the annual meeting, and it depends on where companies are in that timeline as to what they’re doing in terms of soliciting. “Yes,” commented Meyer, “we’ve been hearing for several years now how important the off-season engagement is.” I said that seemed to me like a pretty significant change from, say, five years ago, not just around the Say on Pay vote, but around other issues as well? “Yes,” Meyer replied, “Say on Pay kicked it off but the range of topics commonly discussed is now expanding to include more detailed discussions on long-term strategy, board composition and refreshment, CEO succession and environmental and social issues, among other things. Companies can get a little frustrated if they feel that investors say they want to engage but then don’t have time or are unprepared for calls but I think people are making the best efforts on both sides.”
I said there are some companies that are very active about off-season engagement. That also seemed to be a new thing, and also part of the proxy solicitation process. Meyer commented: “Some investors are good at communicating what they are looking for, and some companies are more responsive than others, so when that comes together, that kind of proactive engagement can help companies limit shareholder proposals or avoid withhold or against votes targeting directors.

Sometimes a company may feel that shareholders are asking for too much and it just doesn’t make sense, or they say ‘I hear you, we can do better on that, we’ll take a crack at it’. Most sophisticated shareholders will be satisfied with that and will give the company some time to respond, it doesn’t all have to be done in year one.”
We seem to be moving, in the US, I commented, towards the European model of shareholder engagement, in terms of shareholders being able to have access both to independent directors and to management. I asked if Meyer thought that was a model that US companies were getting more comfortable with? “That also varies by company,” she said. “The initial reaction was fairly negative on the company side, we saw that many companies really didn’t want to put their directors out there and concerns were raised about Reg FD [the regulation that requires company announcements to be available for all shareholders] and other issues.But shareholders have continued to prevail on companies, developing Stewardship Principles and Corporate Governance Principles that demonstrate, both on the company and the investment side, when it might be appropriate for a director to take the time to meet with them. There are still companies who are saying ‘no’ unless it is absolutely critical, and there are investors who publicly say they believe having directors on calls is critical but then don’t have the interest or the bandwidth in speaking with a company’s directors when proactively offered. Hopefully it will all settle down and companies will only need put a board member on the phone when it’s necessary and they can add valuable perspective.”
Clearly the success of so many shareholder proposals has made the process not just more time consuming, but also more complex for corporations.