Approaching Shareholder Engagement in 2024

Doug Schnell and Sebastian Alsheimer are Partners, and Daniyal Iqbal is an Associate at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Mr. Schnell, Mr. Alsheimer, Mr. Iqbal, and Richard Blake.

It has never been more important for public companies to engage—and engage regularly—with their shareholders. Sustained engagement helps companies communicate their strategy, understand shareholder perspectives, and even receive early warnings about impeding shareholder activism.

Below are some perspectives on this critical initiative.

  • Clearly and continuously articulate your strategy for value creation. Shareholders are eager to understand how a company proposes to build value. That message must be easy to understand and reinforced regularly. For example, the rationale for the company’s asset portfolio, business mix, and capital return objectives should be thoughtfully communicated by management and well-understood by shareholders. In short: never assume that your shareholders understand your strategy.
  • Be open to opportunities to boost shareholder value. Companies should examine their business the way an activist does and look for opportunities to boost value. This involves periodically looking at your company and its assets and businesses, and then being proactive about communicating why that mix is the right one—and making changes if the mix isn’t right. Don’t wait for an activist to provide “helpful suggestions” about this work. Put differently, if a company has one or more businesses that do not obviously fit together, it is a good bet that at least one activist has already noticed. As part of communicating your strategy, explain to shareholders—clearly and simply—why your business mix is appropriate.
  • Understand your shareholder base and tailor your message to it. Take the time to understand your shareholder base and the unique considerations of your investors. And keep in mind that the shareholder base at most companies changes over time; as a result, the priorities, objectives, and desires of shareholders will evolve. As such, the message that you deliver, and the way that you deliver it, will need to evolve as well. Ensure that your shareholder engagement programs meet current investor expectations, including as to director and senior management participation, cadence of meetings, tailored agendas for effective dialogue, and clear articulation of value creation strategies.
  • Focus on board composition and refreshment. A robust and thoughtful approach to board refreshment is a key tool of the most effective boards. Institutional shareholders appreciate seeing changes in board composition and view a regular cadence of new directors joining a board as evidence of a healthy boardroom dynamic. Many boards are now using a “continuous recruitment” model, where they are continuously on the hunt for new director candidates to join in both the short and long term. Be mindful, however, that refreshment involves looking at more than just the simple metrics of age and tenure. Instead, approach refreshment in a holistic manner that focuses on each director’s ability to contribute to boardroom discussions. Many companies are evolving rapidly, and a director who brought necessary skills just a few years ago may not be best positioned to help a company in the current stage of its journey.
  • Keep director bios updated and be specific about how each director contributes. Although still new, the universal proxy rules have cast a brighter light on the skills and qualifications of each director. As such, director bios—in both the proxy statement and on the company’s website—should focus on how each director’s background, experience, and skill sets add unique value to the board. This should be more than just a recitation of a director’s job history and education. In short, avoid boilerplate.
  • Proactively review and, if appropriate, enhance governance practices. Governance is almost never the central feature of an activism campaign, but it is frequently used as a wedge issue by activists to paint a board of directors as entrenched and out of touch. As such, companies should regularly evaluate their governance practices and look for proactive measures—such as the adoption of majority voting in director elections, the elimination of supermajority vote provisions, and even, in appropriate circumstances, voluntary declassification of the board—that can be taken to show the board’s deliberate approach to governance. Shareholder engagement is a long game, and, as with board refreshment, years of thoughtful evolution can reassure shareholders that the board prioritizes good governance and has sufficient internal will to make changes when they are warranted.
  • Monitor what’s being said and done. Monitor the ratings and feedback of proxy advisory groups such as Institutional Shareholder Services and Glass Lewis and seek to correct any inaccuracies. Track and understand investor conference call participants, one-on-one requests, and transcript downloads. Watch sell-side analysts, active asset managers, and internet commentary and media reports for opinions or facts that will focus attention on you. Be mindful of changes that peer companies are making to their businesses and governance practices, as well as any key industry trends. If your strategic messages are not resonating, then look for ways to improve them.
  • Speak with one voice. Companies should always present a unified front to the external world. Open and rigorous debate is an important part of decision making, but that discussion should remain in the boardroom. Directors should be careful not to speak on behalf of the company or the board—even on seemingly immaterial matters—unless explicitly authorized to do so.
  • Listen actively and be open to change. Companies that truly listen to their shareholders typically understand where they are falling short. Directors should consider implementing a process to regularly receive unvarnished shareholder feedback in board meetings, along with an understanding of how management intends to address shareholder concerns. And when criticism is leveled against you (as it undoubtedly will be), don’t adopt a close-minded or defensive approach, as this can facilitate a narrative that directors are entrenched and out-of-touch. Instead, welcome feedback from shareholders and treat it seriously and with respect, even if you ultimately conclude that you have to agree to disagree.
  • Consider reporting on your shareholder engagement activities. A continuing best practice is to discuss the results of your shareholder engagement activities in your proxy statement, including disclosing the percentage of shareholders with whom senior management met during the year. Many companies include “what we heard, what we did” charts and summaries in their proxy statements. These charts and summaries describe the nature of shareholder feedback received over the course of the year and detail how the company responded to that feedback. Even if this disclosure ultimately is not included in the proxy statement, it can be very helpful for framing discussions with the board and its committees about shareholder concerns. In some cases, discussion of a company’s response to shareholder feedback may be expected. For example, if the company received a lower vote on say-on-pay or had a shareholder proposal that passed or received a meaningful “For” vote, discussion of the company’s response in the proxy statement will be expected by proxy advisory firms and many institutional investors.

For more information on structuring shareholder engagement efforts, or responding to engagement requests from shareholders, please contact any member of the firm’s shareholder engagement and activism, public company, or mergers and acquisitions practices.

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