Hot Topics – Deloitte
Shareholder engagement used to consist of shareholders attending analyst conference calls, quarterly earnings calls, and the annual meeting of shareholders; now, more often, shareholders are meeting one-on-one with representatives of the companies in which they invest. There is a recent trend of shareholders demanding personal interaction with directors and not just the investor relations officer (IRO) or members of the management team. This reflects a new era in corporate governance.
Boards that have strategically increased shareholder engagement have found it
provides a good source of communication from shareholders directly. Although it has become more common, organizations still have a lot of questions about how to begin shareholder engagement, how frequently this contact should be made, who should be making contact, and what the discussion should entail.
How does the shareholder engagement process begin?
It is important to understand the benefits and opportunities that can result from
engaging shareholders, such as establishing a respectful relationship, increasing
transparency, and developing a rapport. The engagement process begins with
thoughtful preparation to ensure the dialogue is effective. As a first step, organizations
should assess shareholder ownership. Direct engagement with all shareholders is
unlikely to be achievable, but it is beneficial to understand where significant ownership
lies and to target specific shareholders.
Once an organization understands its shareholder base, it is essential to outline an
effective strategy to successfully communicate with shareholders. This includes thinking
through issues including the parties to be involved, methods of communication,
objectives, frequency, and documentation of shareholder concerns during and after the
engagement process. Many organizations consult a third party to help establish these
parameters. A proactive, documented approach, as opposed to responding to ad hoc
shareholder demands, is becoming a more common approach among organizations
that engage with their shareholders.
What should the discussion entail?
The agenda for any shareholder meeting should be prepared in advance and be limited
to specific topics of discussion. This will help reduce the chance of miscommunication
and also lessen the risk of violating the SEC’s Regulation Fair Disclosure (FD), which is
intended to promote full and fair disclosure of information by issuers and to clarify and
enhance prohibitions against insider trading (e.g., selective disclosure of material
While more and more organizations are being proactive in their outreach, in many
instances shareholder engagement begins with submission of a proposal by a
shareholder which drives the request to discuss the topic with the organization.
According to data from Institutional Shareholder Services, shareholder proposals had
increased by approximately 10 percent as of July 2013 when compared to 2012. The
most common shareholder proposals involve political contributions and lobbying, board
declassification, independent chairman/leadership structure, and board elections.
Who should participate in the discussion with shareholders?
Historically, the IRO often would be the lone representative to meet with shareholders;
however, that is no longer the case. Today, typically a representative from the general
counsel’s office and a representative from the management team participate in
discussions with shareholders to ease some of the risks of miscommunication or
inadvertent violations of Regulation FD. Members of management often participate
because they have firsthand knowledge of business issues and may be able to add
meaningful insight to the discussion. Management is typically the first line of contact
with shareholders but, depending on the topic, shareholders may also want to meet with
certain board members.
Shareholders are often interested in speaking with independent directors to gain an
unbiased perspective. The most requested contact is with the compensation committee
chairman to discuss executive compensation. Some organizations prefer to have the
independent lead director participate as the voice and sole representative of the board.
Some organizations have elected to have the shareholder engagement process
available to the full board rather than one or two select board members. There are pros
and cons to each approach. Having the full board participate may not be a good option
for some organizations, as it can lead to an inefficient and ineffective dialogue. Having
too many individuals in attendance can hinder meaningful interaction between the
board and the shareholders and increase the potential for distraction from the topics of
discussion. Conversely, having the full board participate may be a sound strategy for
some organizations, providing a platform for the board and management to hear from
shareholders directly on matters of potential concern. Some boards have created a
special committee whose sole purpose and responsibility is to develop, maintain, and
report on shareholder engagement.
How frequently should shareholders be engaged?
The frequency of contact will depend on each individual board’s preference and the
frequency and nature of shareholder demands for engagement. Organizations may
contact shareholders in advance of their proxy season as a way to help refresh their
proxy disclosure and better prepare for potential shareholder proposals. Below are a
few examples of other ways organizations can increase their engagement frequency
· Schedule additional calls to supplement quarterly earnings updates
· Organize semi-annual meetings of shareholders
· Host virtual meetings
· Host social events or informal shareholder meetings
· Plan touch points outside of the proxy season.
There is no one-size-fits-all frequency for shareholder engagement. Some
organizations’ only communication is via proxy disclosures and press releases. For
others, more frequent and proactive engagement of shareholders is effective in this new
era of corporate governance.
Shareholder engagement activities will likely continue to increase among organizations
and boards. A proactive and well-planned shareholder engagement strategy can be an
effective tool to help foster relationships, enhance transparency, and hear from
shareholders firsthand. Properly planned and executed effectively, shareholder
engagement can be beneficial for management, the board, and the organization.
Hot Topics articles are featured in each issue of Corporate Governance Monthly, a newsletter with the latest information for boards of directors and their committees from the Center for Corporate Governance (www.corpgov.deloitte.com).
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