Governance Insights Center

Director-Shareholder Insights

June 2016

Director-shareholder
engagement: the new
imperatives
Companies’ shareholder engagement efforts
are growing more robust, and directors are
playing increasingly important roles.

Investors expect a new approach to engagement—

one that covers important topics, meets their
needs, and often involves directors. Companies
with effective engagement programs are seizing
the opportunity to build important relationships
with long-term shareholders before crises hit. And
they’re taking credit for them publicly, setting the
bar higher for other companies. So how does your
company measure up?

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 Governance Insights Center
Director-Shareholder Insights

What are the new

imperatives for directors?

Not so long ago, management, usually through What shareholder engagement looks like in 2016
investor relations, was responsible for any
communications with shareholders. Directors Companies that disclosed they
had little or no contact with shareholders beyond engaged with shareholders

attending the annual general meeting—and

that’s pretty much the way the directors liked it.
But things began changing rapidly, starting when
shareholders got say on pay votes in 2011. 64%
Directors (especially compensation committee
chairs) began speaking with investors when Of those:
companies failed or came close to failing their
say on pay votes. Directors also started meeting
with major shareholders when there were high- Indicated directors
profile shareholder proposal campaigns and
38% were involved

proxy contests.

Given the rise of activist investors, it’s critical

for directors to build relationships with major
investors before any challenges arise. We’re now Described the
in a new engagement landscape. 95% topics discussed

• Engage with your shareholders.

Shareholders expect directors to participate Reported they
in the company’s shareholder engagement took some action
program. Building relationships with
64% as a result of the
engagement
shareholders is particularly important given
the presence of activists.
• Be transparent. Expand disclosures about
Source: PwC analysis of 2016 proxy statements of 100 S&P 500
your company’s engagement program: which companies, judgmentally selected to represent multiple sectors,
directors were involved, what topics you April 2016.
discussed, and what actions your board took
in response.

Director-shareholder engagement: the new imperatives 2

 Governance Insights Center
Director-Shareholder Insights

What are your investors

looking for?

Major institutional investors engage with many of

their portfolio companies every year.1 Sometimes
these are through in-person meetings, but they
may be done via telephone or during investor days.

The discussions focus on:

• company performance, particularly for

underperforming companies
• key risks—cybersecurity, climate change,
environmental and social issues, risks brought
by significant changes impacting the sector
• governance concerns—board refreshment,
diversity, shareholder rights, proxy access
• the board’s role in overseeing areas such as
strategy, risk, executive compensation, CEO
succession, and capital allocation
Investors indicate that they’re satisfied connecting
with management on most of these subjects.
Investors don’t expect directors to attend every
meeting. We’ve heard investors estimate that
directors participate in about 20% of
these engagements.

But in some cases, investors want to talk with

directors. Sometimes it’s because they think
management hasn’t responded to their concerns.
Or they believe directors would benefit from
hearing “unfiltered” investor perspectives.
Other times it’s to express concerns about board
performance or the performance of certain
individual directors. And so more investors are
calling for companies to adopt protocols for
director involvement in shareholder engagement.

1 Investors that disclose engagement policies on their websites include State Street Global Advisors, BlackRock, Vanguard, MFS,
and The Capital Group, among others.

Director-shareholder engagement: the new imperatives 3

 Governance Insights Center
Director-Shareholder Insights

What investors say about engagement

BlackRock
“[Our] global team engages with approximately
1,500 companies per year on a range of issues.”
“We meet with executives and board directors…
Engagement helps better inform our voting and
investment decisions.”
“We engage in a constructive manner. Our aim is to
build mutual understanding and ask questions, not
to tell companies what to do.”
The Capital Group
“We conduct thousands of in-person meetings and
conversations each year with senior management and
directors of portfolio companies. This allows us to assess
not just the operations and strategies of the companies
we follow, but also to make informed assessments of
the individuals who guide and manage them. The
relationships we build through this process can also
result in companies seeking our input on a variety of
corporate governance matters.”

“We generally prefer to engage in the first instance Vanguard

where we have concerns, and give management “In the past 12 months, we spoke with the
time to address or resolve management or directors of nearly 700 companies
the issue.” encompassing approximately $900 billion in
What investors say Vanguard fund assets.”
about engagement
MFS
“…we sent letters to the chairpersons, lead
“…[our] Proxy Voting Committee engaged with senior
representatives from 213 distinct portfolio companies independent directors, and/or CEOs of 500 of the
(298 engagements in total) in 13 different markets funds’ largest US holdings. Our objective was to
during the 2015 Proxy Period, representing 11% of encourage enhanced discussions between directors
issuers that we voted on…” and shareholders.”

“We have no interest in telling companies how to

“Our goal when engaging with our portfolio companies run their businesses, but we have valuable governance
is to exchange views on topics ranging from executive insights to share with the board of directors.”
compensation to environmental issues…”
“Large shareholders like Vanguard want to know
your approach and how you plan to engage
“We are always open to engage with any company
[with investors].”
on any issue…in order for our voting decision to be
adequately informed.”

Sources:
BlackRock, Investment Stewardship, https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship, viewed June 9, 2016.
MFS, 2015 Global Proxy Voting and Engagement Report, https://www.mfs.com/wps/FileServerServlet?articleId=templatedata/internet/file/data/
backlot/proxy_voting_engagement_report&servletCommand=default, viewed June 15, 2016; Proxy Voting and Engagement Report, February 2016,
https://www.mfs.com/wps/FileServerServlet?servletCommand=serveUnprotectedFileAsset&fileAssetPath=/files/documents/backlot/2016_proxy_
report.pdf, viewed June 15, 2016.
The Capital Group, American Funds and Corporate Governance, https://www.thecapitalgroup.com/us/announcements/american-funds-corporate-
governance.html, viewed June 15, 2016.
Vanguard, Our proxy voting and engagement efforts: An update, for the 12 months ended June 30, 2015, https://about.vanguard.com/vanguard-proxy-
voting/update-on-voting/, viewed June 9, 2016; Text of a letter sent by F. William McNabb III, Vanguard’s Chairman and CEO, to the independent
leaders of the boards of directors of the Vanguard funds’ largest portfolio holdings, February 27, 2016, https://about.vanguard.com/vanguard-proxy-
voting/CEO_Letter_03_02_ext.pdf, viewed June 9, 2016.

Director-shareholder engagement: the new imperatives 4

 Governance Insights Center
Director-Shareholder Insights

What should directors expect

of management?

The new activist environment means it’s even
more vital for companies to engage with their
shareholders. Engaging helps you understand
where your key shareholders believe you are
vulnerable. Then you can either decide to address
those issues or affirm—and perhaps better disclose
your reasoning behind—your previous decisions.
This lets you be prepared if (or when) an activist
comes calling.
Directors should ensure management has a
thoughtful, ongoing program for shareholder
engagement. The best ones:
The most critical messages to get right in
engagement discussions relate to how the
company’s strategy ties to long-term value and how
key decisions relate to the strategic plan—both
areas of intense interest to shareholders. Directors
will find that examining and debating those topics
will help focus their discussions with management
about company strategy. Once directors are
satisfied the company has an appropriate strategic
plan, they can provide management with input
on messaging.

Regularly track who owns the

company stock
Focus engagement on long-term
shareholders
Set targets for annual engagement—
We are asking that every CEO lay out
e.g., the 20 largest shareholders, or for shareholders each year a strategic
shareholders representing 60% of framework for long-term value creation.
the base Additionally, because boards have a
Engage at the right time—i.e., not critical role to play in strategic planning,
during proxy season, unless there’s we believe CEOs should explicitly
a compelling issue
affirm that their boards have
Integrate messages with what the
company discloses on analyst calls,
reviewed those plans.
during investor days, at its annual Larry Fink, BlackRock CEO, in a letter to S&P 500
meeting, and in its SEC filings CEOs, February 20162
Clarify when to involve key
members of the C-suite
Ensure concerns heard during
discussions are fully discussed
with both senior management
and the board

2 Matt Turner, “Here is the letter the world’s largest investor, BlackRock CEO Larry Fink, just sent to CEOs everywhere,”
Business Insider, February 2, 2016; http://www.businessinsider.com/blackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2.

Director-shareholder engagement: the new imperatives 5

 Governance Insights Center
Director-Shareholder Insights

How are directors

getting involved?

Having directors participate in direct engagement

Protocols for director engagement
with certain major investors can be incredibly
with shareholders
beneficial. Establishing a relationship of trust
between key directors and major shareholders is In early 2014, a working group of independent
especially helpful if the company subsequently directors and representatives from large,
finds itself in activists’ cross hairs. long-term institutional investors issued the
Shareholder-Director Exchange (SDX) Protocol.
While more boards are stepping up, some directors
It provides a framework for engagement
are reluctant to get involved.3 Among other things,
between shareholders and directors of US
they worry about delivering mixed messages and
public companies. Investors are urging boards
violating Regulation Fair Disclosure (Reg FD). (For
to consider adopting and clearly articulating a
ways to communicate in a Reg FD-compliant way,
policy for shareholder-director engagement.
see Director dialogue with shareholders—what you
need to consider, p 14.) Some companies paid attention. Our review of
100 proxy statements found 28 companies that
But with the environment changing, it’s more
disclosed a process for shareholder engagement
likely that at least some directors will engage with
with the company’s directors—with two of those
company shareholders in some way. Even directors
specifying they endorse the SDX Protocol.
who have resisted being proactive with shareholder
engagement may change their position if the
company is under attack.
How can boards prepare for investor meetings?
If that happens, someone on the board has to be
• Know who your investors are and how much
prepared and ready to handle communications.
they own
In our review of 100 company proxy statements, • Determine which investors you would be
we found that 42 identified who on the board is willing to meet with—possibly based on
or would be involved in any engagement effort. ownership percentage
Almost without exception (41 of the 42), they
• Identify the director(s) who will be involved;
identified the lead independent (or presiding)
properly prepare them for the meeting
director as the one to be involved in any
shareholder engagement. • Agree on appropriate agenda topics
• Know the company’s strategy story and how the
capital allocation plan aligns with it
• Understand how to comply with Reg FD

3 In PwC’s 2014 Annual Corporate Directors Survey, 22% of directors “very much” agreed it is not appropriate to engage
directly with investors on any subject.

Director-shareholder engagement: the new imperatives 6

 Governance Insights Center
Director-Shareholder Insights

What are companies disclosing?

While many companies disclose they have a Of the 64 companies that disclosed they had
shareholder engagement program, the quality of engaged with shareholders, 61 disclosed the topics
what they say varies. discussed. Compensation was most frequently
cited. Almost half the companies also referred to
The best disclosures describe:
“corporate governance” or “governance practices”
• the outreach program, including what as topics of discussion.
proportion of shareholders they want to reach
and the frequency or timing of outreach,
Compensation tops the shareholder discussion list
• how the engagement happened (e.g., in-person
meetings, conference calls), Percentage of companies that disclosed they
discussed the following topics with shareholders
• the topics covered during the discussions,
• the number (e.g., ten of our largest 18%
shareholders) or percentage of shareholdings
47% 11%
(e.g., over 60% of our outstanding shares)
represented by meeting participants,
• the reasons driving any special or new
Proxy
outreach efforts, such as a fall in say on pay access
Strategy
approval rates,
• who from the company was involved, 9%
including who from the C-suite,
Compensation 9%
• whether directors were involved in the
engagement—and, if so, which directors (e.g.,
Board
lead director, compensation committee chair), structure Performance/
• what feedback the company received, and operations

• the specific actions taken in response to

Source: PwC analysis of 2016 proxy statements of 100 S&P 500
the discussions. companies, judgmentally selected to represent multiple sectors,
April 2016.
The most common actions disclosed were changes
in compensation programs and the adoption of
proxy access, while others mentioned increased
disclosure about board composition and
refreshment, changes to financial metrics to align
better with company strategy, and enhancement of
other company disclosures.

Director-shareholder engagement: the new imperatives 7

How PwC can help
To have a deeper discussion about how this topic might impact
your business, please contact your engagement partner or a
member of PwC’s Governance Insights Center.

Paula Loop
Leader, Governance Insights Center
(646) 471 1881
paula.loop@pwc.com

Catherine Bromilow
Partner, Governance Insights Center
(973) 236 4120
catherine.bromilow@pwc.com

Project team
Elizabeth Strott
Research Fellow
US Thought Leadership Institute

Christine Carey
Marketing
Governance Insights Center

Carol Brawley
Senior Associate
Governance Insights Center

Ryan Lasko
Design
Creative Team

pwc.com
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