Paula Loop is the leader for PwC’s Governance Insights Center, which aims to strengthen investor confidence and provide resources for directors and investors addressing new and traditional challenges. Loop has more than 20 years of experience at PwC, she brings extensive knowledge in governance, technical accounting and SEC and financial reporting matters to companies and boards.
Christopher P. Skroupa: What is shareholder engagement looking like in 2016?
Paula Loop: Investors are expecting a new approach to engagement. This emerging discourse incorporates many important topics, and it will require directors to engage in the dialogue as well. Forward-looking companies are seizing this opportunity to build important relationships and bridges before crises hit. Some companies are making their efforts public. PwC reviewed the 2016 proxy statements of one-hundred S&P 500 companies, judgmentally selected to represent multiple sectors. Their findings concluded that 64% of companies disclosed their engagement with shareholders, and 38% of them indicated directors were involved.
Skroupa: Is there progress in advancing the call for more frequent engagement?
Loop: Investors are saying that they would like to hear from key executives—and even directors—on a more regular basis. Discussions could be held annually, or more frequently, depending on the company’s facts and circumstances. Companies will have several things to consider when thinking about their shareholder engagement plan. For example, they will want to address their key messages (what points do we want to get across?), who to meet with (should we prioritize based on size or influence?), the time commitment (how often to meet? When is the best timing to limit overall distraction?), the presenters (do we include someone from the board?), and Reg FD or “Fair Disclosure” (how do we educate presenters so that they don’t disclose something material that is not yet public?).
To address these concerns, some companies have taken a proactive approach to develop a robust set of policies and protocols for shareholder engagement. The role of the board in these communication plans will be an area that should be addressed early in the process. An important point to keep in mind is how the company will measure success from their shareholder engagement effort.
Skroupa: So, how do you measure success?
Loop: Effective shareholder engagement implies an interaction between parties—and saliently, an interaction means a dialogue or discussion that includes questions, comments, concerns, and even debate. Merely presenting to an investor audience does not meet the definition of engagement. The company must identify and understand the investors’ interests; and then align the discussion to meet those areas of focus. For example, if the company is meeting with an investor that is outspoken about board diversity or ESG matters, those items need to be on the agenda.
Executives should encourage an investor dialogue that includes an interactive discussion where the investors can raise any concerns about perceived risks—this will enable the company to effectively respond. The goal should be to really listen to investors and return to the office with a better understanding of how they view the company. Investor input should be absorbed, as it is a leveragable opportunity that can be used to revamp the company’s strategy or messaging. The true measure of a successful engagement effort is to gain valuable insights from your most influential investors and develop an effective plan to address their concerns.
Skroupa: Should directors participate in shareholder engagement activities? What are the barriers involved?
Loop: Many CEOs are hesitant about their directors participating in dialogues with investors. They are concerned about whether a director can convey the right message and effectively comply with Reg FD. Another trepidation is that investors might become confused about who to pose questions. They may look toward directors, rather than the CEO and senior management, for areas that are really the responsibility of management. So, it is important that directors are comfortable indicating in their responses to investors that certain questions are more appropriate for management to address.
In tandem with CEOs’ concerns, many directors may have similar apprehensions when engaging with investors. They may be concerned about being asked questions outside of the board’s scope of responsibilities or that are too detailed for their oversight role. The focus for directors should be on questions related to their oversight of the CEO’s compensation and the company’s strategy and capital allocation plans. Board composition is another topic that can be appropriate for discussion. For directors, it is critical that they appropriately manage questions from investors and ensure their responses comply with Reg FD.
Skroupa: What are your predictions for the ultimate outcome of shareholder engagement?
Loop: Engagement will primarily be led by the CEO, however, in some cases the involvement of directors will be critical. For example, when discussing the CEO’s compensation package, investors typically like to speak to the director leading the compensation committee. Overall, directors can have a very positive influence on a company’s shareholder engagement efforts when provided with the appropriate preparation.
Investor insight is very helpful to both the executive team and the board of directors. It helps with understanding where shareholders believe there are lurking vulnerabilities and allows companies and boards to address issues proactively. This engagement is particularly important in today’s activist shareholder environment as it allows companies to be better prepared if—or when—an activist comes calling.
Christopher P. Skroupa is the founder and CEO of Skytop Strategies, a global organizer of conferences.