At a time when engagement is front and center in the public debate about corporate America, this study provides the first-ever benchmarking of the level of engagement between investors and public corporations (issuers) in the United States. As evidenced by the provisions of the Dodd-Frank legislation, various SEC rule-makings and the lawsuits contesting them, engagement has emerged as a central governance process for public companies in America. Despite that fact, there has never been a comprehensive picture of investor/corporate engagement and thus no consensus definition of engagement. This study attempts to rectify that lack. It surveyed 335 issuers of stock and 161 investors, including both asset owners (e.g. pension funds, trusts, etc.) and asset managers.
The study reveals both consensus and dissonance. There is broad consensus that engagement between issuers and investors is common and increasing both in terms of frequency and subject areas; that engagement is expanding beyond financial and strategic issues and “traditional” governance topics to include more environmental and social issues; that issues related to executive compensation remain atop the agenda; and that engagement is evolving as increasingly-sophisticated investors demand more detailed information on all of these topics. Yet engagement also means different things to different people: While some use the term to refer to a campaign to persuade a company to change its behavior, others (particularly issuers themselves) classify routine conversations with investors about financial results as engagement as well. The study also reveals some distinct differences between investors and issuers in terms of the time frame of engagements and the definition of a successful engagement.
Highlights of the study include:
- The level of engagement between issuers and investors is high. Approximately 87% of issuers, 70% of asset managers and 62% of asset owners reported at least one engagement in the past year.
- The level of engagement is increasing. 53 percent of asset owners, 64 percent of asset managers, and 50 percent of issuers said they are engaging more. Virtually none of the investors and only 6 percent of issuers responded that engagement is decreasing.
- Amongst investors, engagement is either a priority or a non-event. A bimodal (or “barbell”) distribution was evident, with 28% of asset owners and 34% of asset managers reporting engagements with more than 10 companies. On the other hand, about 45% of asset owners and 43% of asset managers indicated they did not initiate any engagement activity whatsoever.
- Despite the headlines that result from high-profile conflicts between issuers and investors, the vast majority of engagements between issuers and investors are never made public. About 80% of issuers said most engagements remain private, as did 72% of asset owners and 62% of asset managers.
- Asset owners, asset investors, and issuers do not always agree on what constitutes “successful” engagement. While all three groups believed constructive dialogue on a specific issue was a success, issuers were materially more likely than investors to think that establishment of a contentious dialogue was a success. An even more dramatic difference was that about three quarters of both asset managers and asset owners defined either additional corporate disclosures and/or changes in policies as a “success” while only about a third of issuers agreed.
- Engagement is most likely to lead to concrete change by issuers in areas where shareholders are broadly in agreement, such as declassification of the board of directors or the elimination of poor pay practices, than in areas where shareholders’ views diverge, such as the need for an independent board chair.
The study also revealed that issuers’ greater willingness to be satisfied with the mere establishment of a dialogue has led them to report greater levels of success. While a majority of investors (approximately 56 percent) report that their engagement efforts in the past year were “sometimes successful,” and only about 40% of investors claimed that such efforts were “always” or “usually” successful, roughly 80 percent of issuers responded that their efforts were “always successful” or “usually successful.” A majority of asset managers say that the three-year trend is toward their engagement activities becoming more constructive or successful, while majorities of both asset owners and issuers reported that the success of their engagements was about the same as three years earlier.
There is a marked discrepancy in the perceived duration of engagements. Both investors and issuers report that the length of an engagement can certainly vary depending on the nature of the issue. However, a majority of both asset owners and managers indicated that an engagement typically lasts more than a month. In stark contrast, a majority of the issuer respondents indicated that engagements typically last a week or less.
The most common impediments to engagement appear to be resource-related: around half of issuers and three-fourths of institutions report that time is the most common impediment to engagement, while staffing considerations rank second for investors. In addition, nearly 30 percent of issuers and 26 percent of institutions report that philosophical considerations are impediments.
A majority of the survey respondents reported that their engagement activity has been increasing, if not compared to the immediately previous year, then certainly compared to earlier years. Reasons for the increase include the financial crisis and its impact on portfolios, regulatory developments, and corporate governance reforms, such as the adoption of majority voting for directors, which have raised the stakes for what were formerly viewed as routine shareholder votes. A majority of respondents – particularly among investors – cite time and staffing constraints as impediments to engagement, implying that a recovery in the financial markets and the broader economy, which would enable institutions to increase their staffs, could lead to a further increase in engagement, rather than simply a return to pre-crisis levels. Notwithstanding the obstacles and frustrations discussed above, retrenching on engagement does not seem to be an option for most respondents.
The comments of both issuers and investors indicate that there has been a shift in power in the relationship between the two groups, due to: new rules (such as mandatory “say on pay” votes and proxy access) explicitly designed to give shareholders more of a voice; the efforts of shareholders to push companies to enhance accountability through majority voting, declassified boards, and shareholder approval of takeover defenses (all of which are now regarded by investors as “best practices”); and widespread skepticism that boards have done an adequate job of managing risks and ensuring that executive pay is appropriately linked to performance. As a result of this power shift, issuers appear more willing to engage, both in response to shareholder requests and proactively at their own initiative. Investors, likewise, may have more to gain from engagement because the impact of their votes has increased. Notwithstanding the recent challenge from the issuer community to the SEC’s proxy access rule, which has succeeded in delaying the implementation of this mechanism, it is difficult to imagine a significant reversal of this power shift in the near future.
At the same time, the shift in power should not be overstated. Smaller asset owners and managers continue to experience some frustration, particularly when seeking to engage with directors. And even for large investors, the fact that issuers are more eager to talk does not always equate to an eagerness to make the changes sought by shareholders. The attitude of some issuers that engagement should preferably be limited to financial results and strategic talking points, rather than issues like board structure or executive compensation, has not entirely disappeared. Moreover, it appears that some shareholders lack either the resources or the desire to engage more than they are already doing, even where their portfolio companies would like to do so.
That said, a significant finding of this study is surely the fact that virtually all respondents view their engagement activity as being either the same as or more successful than in the past. It is worth reiterating the keys to success cited by participants:
- doing one’s homework prior to the engagement;
- making sure “the right people” are taking part;
- being open-minded and willing to listen to the other side; and
- building relationships through transparency and credibility.
While a strict definition of engagement “success” remains elusive, more hard data on engagement practices and outcomes will continue to shed light on a topic that is clearly growing in importance for all market participants.
The complete study is available here.