A new study finds that the level of engagement between investors and publicly traded U.S. corporations is at an all time high
New York, NY; April 10, 2014 – A new study finds that the level of engagement between investors and publicly traded U.S. corporations is at an all time high. Both investors and corporate officials surveyed believe the increased level of engagement is successful.
The study finds that the new requirement that U.S. companies seek shareholder approval on management compensation (“say on pay” voting) is the largest reason for the increase. “Say on pay” was credited by nearly one-half of both investors and companies as a cause for the increase in engagement. However, this issue is only part of a broader shift in dialogue. Engagement trends continue to deepen – there are conversations on more issues, discussions are more frequent, corporate directors are more involved, and companies are realizing the upsides of proactive shareholder engagement.
The study, Defining Engagement: An Update on the Evolving Relationship Between Shareholders, Directors and Executives, updates the first-ever benchmarking of engagement completed three years ago. The new report, authored by Institutional Shareholder Services Inc. (ISS) and commissioned by the Investor Responsibility Research Center Institute (IRRCi), surveyed 82 institutional investors with aggregate assets under management of more than $17 trillion, and 133 US-listed companies with an aggregate market capitalization of more than $2.3 trillion. The survey, undertaken during the fall of 2013, was supplemented with 45 in-depth interviews.
Some of the report’s key findings are as follows:
Engagement is more firmly rooted in the corporate governance landscape. Only about one-fifth of both companies (22 percent) and investors (19 percent) had not initiated any engagement in the past year. That number is down from more than one-fourth of companies (27 percent) and nearly one-half of investors (44 percent) three years ago.
The number of engagements is up. Among companies, 47 percent reported initiating more than ten engagements with investors, up from 30 percent three years ago. Among investors, 55 percent reported more than 10 engagements, up from 31 percent in the earlier study.
The degree of success is high.Companies reported their engagements were “usually” successful 72 percent of the time and “always” successful 11 percent of the time, compared with 44 percent of investors who said they were “usually” successful and 6 percent who said “always.” The remainder of respondents for both companies and investors said they were “sometimes” successful; no companies or investors reported that they were never successful. The results are largely consistent with the previous study, which also found success levels higher among companies.
Corporate directors are more likely to take part in engagements today than three years ago, though such participation is still the exception. Investors said, on average, 22 percent of their engagements involved communication with directors, though the median was only 10 percent, suggesting that a few investors may engage with many directors. Companies reported an average of 10 percent of their engagements, and a median of 5 percent, involved directors.
The subject matter of engagement is varied.Both investors and companies reported frequent subject areas were executive compensation and other governance issues. Other frequent topics for investors were: social issues, environmental issues and transactions (such as mergers or acquisitions) and corporate strategy. Corporations reported frequent engagement on financial results, transactions and corporate strategy.
Both investors and companies, but particularly companies, seem to be getting more comfortable with engaging. Both investors and companies are devoting more resources to their engagement efforts.
“This is the rare instance where a regulatory reform is working as intended. No matter your views on say on pay, it has forced increased communication between public companies and shareowners – and that’s a positive outcome,” said Jon Lukomnik, IRRCi executive director. ”Moreover, the conversations have expanded beyond one narrow issue. Issuers and investors now are engaging more frequently on merger and acquisition activity, environmental and social issues, board structure, director qualifications, corporate strategy and financial results.”
“Although engagement levels at an individual company will continue to fluctuate from year to year based on varied factors, evidence suggests that the upward trend will continue,” said Marc Goldstein, study author and head of engagement at ISS. “Dialogue will continue to play prominently as investors seek to mitigate risks at companies they intend to hold for the long-term, while, concurrently, issuers seek to win support for company proposals, ward off activists, and keep shareholders happily invested in the stock.”
Other findings from the report include:
- A majority of survey participants reported that the number of engagements in which they had participated during the previous year has increased. Among investors, 49 percent reported that the number of engagements had increased somewhat, while 18 percent said the number of engagements had increased significantly. The remaining one-third of investors said the number of engagements had not changed, while not a single investor reported a decrease. Nearly one-half of issuers also said that the number of engagements had increased “somewhat,” while 10 percent said it had increased “significantly.” Only 2 percent of issuers reported that engagement had decreased somewhat, but no issuers reported a significant decrease.
- Half of investor respondents reported that the three-year trend was for engagement to expand to cover more topics. Among issuers, 38 percent reported an expansion. Investors noted that they are engaging more on sustainability, environmental and social issues, as well as risk factors including director and management succession and industry-specific risks. Issuers noted engaging more on governance and compensation, environmental and social issues, as well as company-specific factors such as changes to the senior leadership team.
- With respect to defining success, dialogue is the hallmark of a successful engagement for issuers. Some 93 percent of issuer respondents said that a constructive dialogue on specific issues of concern was sufficient to make an engagement successful; while 69 percent of issuers said that the establishment of a dialogue, even if contentious, was sufficient to constitute success. Investors were notably less likely than issuers to equate dialogue with success, although nearly two-thirds of investor respondents did say that a constructive dialogue on issues of concern would make an engagement successful. A slightly higher percentage of investors said that a commitment to engage in the future would constitute success, and 73 percent answered that additional disclosure or a change in company policies or practices would suffice to make an engagement successful.
“Clearly, engagement is not going away. Engagement is here to stay and will continue to grow. So, it seems to be in the best interest of shareowners and issuers to find ways to manage this increased engagement efficiently and productively,” Lukomnik said.
The IRRC Institute is a not-for-profit organization headquartered in New York, NY that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors. More information is available at www.irrcinstitute.org.