CS Insights: Passives Call Timeout on Proxy Season Engagement
With proxy season looming, the Securities and Exchange Commission released guidance that tweaks its definition for how passive investors – including the likes of the money managers such as BlackRock and Vanguard – should engage with companies around governance issues and contested votes. It raises important questions about the dynamic between companies and their largest owners.
First, what changed (in plain English, please)?
Prior Guidance: The SEC’s earlier interpretation allowed investors to express their views on “executive compensation or social issues or public interest issues (such as environmental policies)” without automatically triggering a loss of passive status (13G).
New Guidance: The updated interpretation adds that if an investor “exerts pressure” on management — for instance, by conditioning support for director nominees on specific changes on these issues — the passive eligibility may be lost and the investor must disclose additional detail on its ownership.
This update made headlines when BlackRock and Vanguard decided to suspend corporate meetings while reviewing the changes; meetings that are crucial for board and management team visibility into how their shareholders will vote. BlackRock confirmed it restarted corporate meetings two days later – more evidence that advisors, boards and management teams across the landscape are going to have to adapt in real time.
Current consensus is that these changes will result in less engagement with passives, reduced transparency around voting decisions and greater reliance on actives and smaller shareholders for direct feedback.
Ongoing proactivity
That shift only adds urgency to the investor relations best practice of establishing shareholder dialogues outside the proxy process. Regardless of how passive shareholders modify their engagement, companies should begin developing practices to address potential gaps in shareholder feedback and enhance direct outreach with top holders, including:
1. Eliminate surprises: Use normal course communications – such as earnings calls, conferences and investor presentations – as opportunities to articulate near and long-term strategy and governance practices. Regularly reiterating strategic direction helps institutional and retail investors better understand the company and its trajectory, especially those who lack the access to management afforded to larger shareholders.
2. Acknowledge hot-button items: When engaging, the onus to acknowledge historical criticisms must now shift to issuers, who need to be prepared to communicate a succinct rationale or initiatives to address concerns.
3. Be media smart: Done sensibly, media engagement can provide a vehicle to amplify the strategy and telegraph the direction of the company to both existing and prospective shareholders.
4. Work with proxy advisors: Engage directly with ISS and Glass Lewis before you need their recommendations to understand how their analyses are evolving to inform future governance decisions.
The new SEC guidance is a reminder that as corporate governance practices evolve, so too must investor communications. As traditional engagement potentially narrows for passive investors, boards and management teams need to redouble efforts to effectively communicate their strategies and performance all year long.
