With the shareholder meeting season rapidly approaching, it is important for companies to be aware of the shifts in corporate governance trends. To that end, companies need to know not only which institutional investors own their stock but also how they behave. For example, do they outsource their voting decisions or are decisions made internally? And if decisions are made in-house, which teams own or participate in the voting decision? The investment team or the stewardship team? And, to muddy the waters even more, which institutions have loaned their stock out, thereby reducing their votable share position on record date? To provide an accurate roadmap, Alliance Advisors has outlined five key considerations a company must undertake before finalizing their proxy statement.
1. Analyze your shareholder base to determine who holds shares and how vote decisions are made. All companies should complete an analysis of the institutional and retail shareholders holding the company’s stock. Many company executives will say they know who owns their stock, but in fact they do not because institutions hide behind custodians. A shareholder profile analysis identifies the true institutional shareholders that are holding a direct financial interest in your company’s stock.
Once you know who the true institutional shareholders are, your proxy solicitor will help you understand the level of influence proxy advisory firms, ISS and Glass Lewis, have on institutions and which investors maintain their own internal voting policies. This knowledge allows you to determine where to focus your energy, i.e. if someone strictly adheres with ISS, you may decide it is not worth trying to engage with that investor.
You should also determine if the vote decisions are made by the investment team, stewardship team or a combination of the two. In the event of a negative recommendation or vote, knowing the right group to target to try and override the negative vote or recommendation will be critical. In many cases, your investor relations can be invaluable, particularly around compensation or corporate action-related proposals.
2. Conduct a Stock Loan Analysis. In today’s environment of minimal management fees, institutions are increasingly relying on revenue from lending out shares to short sellers, particularly as higher interest rates make the short rebate more lucrative.
For companies with a large, short interest in their stock, a stock loan analysis identifies the top institutions lending out shares and summarizes the effect on voteable shares. For example, a large institution like Vanguard or BlackRock could hold a substantial stake in your company’s stock, but given they maintain a robust securities lending practice, many of those shares lent out to a short seller as of the record date will not be eligible to vote. Typically, the interests of short sellers and institutional shareholders are not aligned, so those votes are lost. This forces additional solicitation because the anticipated friendly votes the company believed they had in hand are now gone and need to be replaced from other sources. In addition, if this analysis is not done upfront, companies may not know they have an issue until very close to the meeting date when votes typically roll in.
3. Check whether directors may be vulnerable to a negative vote. Review your institutional proxy voting policies and guidelines to determine if a director nominee will run afoul on issues such as gender diversity, over-boarded or over-committed, “poor” compensation practices, lack of sufficient disclosure, etc. This will help mitigate surprises when the voting picks up in the final stretch leading up to the meeting. Passive shareholders are increasingly using an against vote on directors to effect change. Communication is key. Companies that regularly engage with their investors are ultimately the most successful at preventing or navigating voting opposition to their directors and other important ballot items.
4. If you are presenting a new equity plan or amending an existing plan to increase shares, “crunch the numbers” well in advance of going to a vote. Look at your historical burn rate and overall dilution and compare it to the voting policies of your top investors and the proxy advisory firms. Investors and advisory firms also look at qualitative features of the plan and how that will impact their vote. Provide a narrative around the why your compensation programs are effective and work well at your company to enhance shareholder value. Tell investors why you believe your pay-for-performance methodology is working successfully and include context around the business strategy. Explain how your compensation programs drive the company forward.
This will help you maximize the chances of a successful voting outcome and may save you on any unnecessary fees from certain consulting firms, as well as time spent soliciting investors to support the plan.
5. Don’t forget your retail investors. Even if retail investors do not make up a large percentage of your shareholder base, this can be a good group of investors to target if you are faced with a challenging vote. Often, our experience shows that in a close vote, retail shareholders who have been solicited by a proxy solicitor, will be the difference-maker that pushes a proposal over the finish line.
It would not be unusual to see a 10 percent against vote on a controversial proposal. To overcome that 10 percent you would need about 30 percent (three-to-one ratio) of the outstanding shares represented in registered and NOBO shares to bridge the gap. When solicited by a proxy solicitation agent, retail votes generally come in supporting management at a better than nine-toone ratio.
Shareholder meetings are no longer a routine, three-month event. Companies need to prepare well in advance with their proxy solicitor to ensure proper shareholder engagement and shareowner analysis campaigns have been conducted.
Companies that are well prepared know who their shareholders are, what their voting tendencies are and how they are going to vote before the proxy statement is even written.
