Whatever happened to the Shareholder-Director Exchange Protocol?

Tracking down the SDX initiative launched two years ago

The Shareholder-Director Exchange Protocol (SDX Protocol) was created with some fanfare in February 2014 to help foster investor-corporate engagement. After an initial splash it all went somewhat quiet.
It was formed by a working group of leading public company directors, institutional investors and the advisory firms Tapestry Networks, Cadwalader Wickersham & Taft and Teneo Holdings together with servicing company Broadridge Financial Solutions.

The SDX Protocol has 10 points that focus on engagement. These include: encourage parties to adopt clear engagement policies, identify topics prior to a meeting, establish primary contacts, consciously select participants in the process, set meeting types (in person, telephonic, etc.), fully prepare, agree to next steps, regularly review engagement policies and customize the protocol if necessary.
RI decided to track down if and how the protocol is being used. Michelle Edkins, head of BlackRock’s Corporate Governance and Responsible Investment team, was a member of the SDX working group so RI put a series of questions to her. These questions and her responses follow.

How much of a role do you think SDX played in the growth in shareholder engagement over the last four years?

SDX, and the dialogue it helped shape, raised awareness of the benefits of shareholder director engagement. Anecdotally, those companies and directors who didn’t have experience of engaging with shareholders at the board level used the protocol to build internal support for doing so. It is also a tool for preparing for engagement meetings and ensuring they are productive for both the company representatives and investors.

In what situation was SDX most helpful?

For us, it was most helpful as a reference point for those companies who were uncomfortable giving us access to one of their directors. As a practitioner-developed protocol, it addresses many of their concerns because it reflects the experiences of the working group members – directors, investors and professional advisors – who have seen this from different perspectives.

One of the 10 points indicates that management should always be involved, which is different from the UK/European models, developed over the last 20 years that focus on the board, so RI asked whether Edkins agreed that engagement should always involve management.
Management should always be the first port of call for investors, but there may be times when it is better for the engagement just to involve directors, particularly if the purpose of the meeting is to explain investor concerns about management performance, or it’s a situation in which management might be conflicted.

Given BlackRock was already practicing engagement before SDX came along, has the protocol changed its engagement practices?

Not significantly but I would say that we are more deliberate about agreeing the agenda for the meeting with the company.Given that SDX had seen little activity on its website, where complete details of the protocol can be found, RI put the question: What future do you see for SDX?
Given the rapid rate of change in governance practices in the US over the past five years or so, particularly in relation to engagement, a sign of the success of SDX may be that it no longer needs to be a specific project because it is has been widely adopted and woven in to common practice, at least amongst the leading companies.
From the investment side, the protocol does seem to have had some effect on practices in the US, particularly for those companies which had never met with a shareholder, a substantial majority a few years ago. US practices were far behind those in the UK and Europe where most shareholders and companies would have greeted SDX’s release by saying they had already progressed far beyond this basic practice advice. In the UK and Europe most shareholders feel comfortable just picking up the phone and calling a chairman or a director. However, this freedom has been won over 15 to 20 years of engagement in a relatively concentrated market.

Most commentators have said that SDX is useful regardless of the topic of engagement, whether that be succession planning for management and the board, assessment of board and management effectiveness, diversity policies, transactions, investor activism or executive pay.

To get the corporates’ view of SDX, RI then went to the major corporate secretaries association in the US, as corporate secretaries are typically the first point of contact for shareholders within US companies.

Commenting on SDX, Darla Stuckey, President and CEO of the Society of Corporate Secretaries and Governance Professionals, said that engagement between investors and directors has been on the rise in the US over the last five years. “General comments on SDX were that it was read with interest, but in many ways it was what companies were already doing, though it was good to have a framework that they could tailor their own policies within. The ideas behind the protocol, the mechanisms, the agenda, were all seen as very positive developments, especially as Midcap companies start to engage. They are hearing the message, though not necessarily via SDX.”
Stuckey has asked at various functions whether investors had asked for engagement with companies or whether companies had offered engagement and the majority of respondents told her that offers of engagement came mostly from companies, and often took the form of phone calls with directors, not necessarily face-to-face meetings. Company offers of engagement were particularly the case if companies had problems with pay, a negative Say on Pay vote, for example.
Then companies would take their compensation committee chair on the rounds. In her view, corporate secretaries used the Conference Board document [Guidelines for Engagement] more often than SDX. The Guidelines were published in early 2014. “Though it [SDX] also served a purpose,” she added, “and made a splash. The Society also teaches its members how to engage through various methods, including investor forums.”

Stuckey also noted that she knew of only one company that disclosed its use and approval of SDX in its proxy statements describing engagement: JPMorgan Chase. The bank’s proxy statement says: “In addition, the Board has endorsed the Shareholder-Director Exchange (SDX) Protocol as a guide for effective, mutually beneficial engagement between shareholders and directors. During 2015, members of the Board met with shareholders to discuss a variety of topics, including the Firm’s strategy, performance, governance and compensation practices.”She noted also that Labe Jackson, JPMorgan’s audit committee chair, was a member of the original working group for the protocol.
While it does not seem as if SDX has been the sole driver of engagement developments, it would appear to have played a part and to have been of some use along with other guidelines such as the Conference Board’s and the work of organisations for corporate secretaries, non-executive directors and investor relations professionals.