While working with companies for the past four decades, I have both witnessed and participated in what is now called “engagement” but at its inception was simply referred to as “talking to our shareholders.” My perspective on engagement was informed as a proxy solicitor in the early years of my career, at an investor relations agency in the middle, and, for the past decade, at the market leader in proxy and other regulatory filings and disclosures, Donnelley Financial Solutions (DFIN).
For purposes of this discussion, I would like to make a distinction between:
1. engagement with investors focused on board, governance, executive compensation and, increasingly, sustainability issues (typically conducted outside of proxy season);
2. discussions with investors between proxy filings and annual meeting dates with the goal of securing support for specific voting issues (in other words, solicitation); and
3. year-round IR dialogue, focused primarily on company strategy, performance, future outlook and related financial reporting.
Clearly, there sometimes is overlap among the topics discussed in each of these forms of dialogue. This article is focused on the first form of engagement with investors, as described above.
When considering the evolving face of investor engagement, it’s important to distinguish between interactions with two types of investment managers:
• Active managers (those with equity research teams and/or portfolio managers who “kick the tires” of companies and management teams before buying a stock) and
• Indexed or passive investors, who are receiving increasingly large flows of new assets. The Big Three within the indexed or passive group being BlackRock, Vanguard and State Street Global Advisors (SSGA). By the very nature of their investing approach, indexers cannot “pick better companies,” so they use their engagement tool kits to promote practices at their portfolio companies that they believe lessen risk and promote sustainable performance. These tools include publicizing their best-practice preferences, discussing these preferences in one-on-one engagement conversations with companies and reinforcing their philosophies through proxy voting practices, whether filing or supporting shareholder proposals or withholding support from director nominees.
Regardless of whether employing active, passive or a combination of investing styles, a broad range of investors are using engagement to press companies to focus on and discuss:
• ESG risks and opportunities the companies have identified
• Programs to manage risks and capitalize on opportunities, as well as the objectives, targets, and means of measuring progress for these efforts
• Board oversight of the above
• Reporting aligned with major materiality and reporting frameworks (to promote, among other things, comparability among companies).
As with other best practices, companies should not assume that investors, proxy advisors, ESG raters and rankers, regulators and the general investing public will be aware of and give credit for engagement efforts unless these efforts are more broadly disclosed or publicized. Increasingly, disclosure involves discussing not just the fact of engagement but also the process that was undergone, the participants, the topics addressed and, most important, subsequent actions taken that were motivated or responsive to key engagement topics.
Companies typically discuss their engagement efforts in their annual proxy statements, with the engagement results also informing a range of investor relations and ESG/sustainability disclosures. Equilar’s 2022 Governance Outlook report revealed that of the 100 largest companies in terms of revenues, 80.8 percent disclose—and an additional 13.1 percent mention— engagement with their shareholders in their 2021 proxies.
A good example of this is Verizon Communications, which underscored the company’s commitment to a robust shareholder outreach program that includes seeking investor input and feedback on a variety of topics in its 2022 proxy statement. On page 19, the company provided a table listing the ESG-related topics covered in its discussions with investors during 2021. (See box, above. Readers are encouraged to review the full p. 19 and balance of the proxy for proper context.)
In compiling what will be the 10th edition of DFIN’s Guide to Effective Proxies, we have located many additional examples of ESG engagement disclosures that stand out to us, selected from a range of companies and industries. Specifics will be featured in the final guide when it is released in September.