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08/25/2016



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Key Questions for Management Teams as the “Off-Season” Begins

Over the past several years, large institutional investors have consistently pushed management teams to increase both the frequency and scope of their interaction with the investor teams responsible for making governance and voting decisions.  Investors continued this trend in 2016, with several large institutions such as BlackRock and State Street calling for the expansion of “governance focused” engagement to include a specific discussion of companies’ long-term business strategy and the board’s role in overseeing the development and execution of strategy.  Engagement on strategy is meant to provide investors’ governance teams with a clear view of the fundamentals of the current business and future trajectory, which ultimately informs the question of whether the company has the right board, governance structure, executive compensation plan, as well as sustainability and risk management framework in place for its specific needs. 

The 2016 “off-season” engagement period is now beginning, when public companies should reach out to the governance and voting teams at their major investors and proxy advisors to discuss these topics.  Investors will expect companies to be able to respond to detailed questions regarding, for example, how the board’s skill-set aligns with corporate strategy, why the use of non-GAAP financial metrics in the compensation program in fact align with the long-term business plan, and the justification for corporate governance mechanics like the bells-and-whistles in proxy access bylaws.  And they will expect to hear many of these important answers directly from those making the decisions – the management team and, at times, the independent directors. 

Therefore, it is critical for companies to be prepared.  As companies begin to consider next steps following the 2016 proxy season, those charged with communicating the company’s corporate governance and compensation strategy should be asking themselves questions, including the following:

  1. Agenda – Given the increased demand on investors’ governance teams from other companies seeking engagement, what agenda will make our discussions worthwhile to our investors (and increase the probability of engagement)?
  2. Audience – With which shareholders should we be engaging?  With whom at these shareholders should we be engaging?  Do we need to engage with proxy advisory firms?
  3. Feedback – What changes to our governance and compensation program should we seek shareholder input on before we proceed?  And once we have made our decisions, how do we ensure we communicate these changes to our shareholders and the proxy advisory firms so we avoid any misunderstanding during the busy proxy season?
  4. Investor Policies – Do we know our investors’ policies on governance, compensation, sustainability, etc.?  What about how investors analyze non-standard voting issues?  How can we learn more about this?
  5. Materials – What materials are most effective to bring to our investor meetings?  Should we use the same materials and cover the same topics for each investor? 
  6. Substance – Are we confident that our shareholders understand our strategy and believe that we have the right board in place to represent their interests in overseeing the execution of our long-term plan?  How do we best communicate our story on strategy, capital allocation, board, governance, compensation, sustainability and risk management?
  7. Team – Who is on our company’s shareholder engagement team and how do we prepare them to effectively engage?  We understand there is only one or perhaps two opportunities to liaise with our shareholders during the year and we want to maximize our impact.  Should we include board members in the engagement process?
  8. Timing – What is the optimal timing for engagement?  Are there specific shareholders or proxy advisors that we should sequence earlier or later in the engagement cycle?
  9. Trends – What do investors care about with respect to corporate governance, compensation and sustainability topics as we approach the 2017 proxy season?  Which topics are “old news”?  Do any emerging trends create risk for our board or our company?
  10. Vulnerabilities – Are there aspects of our governance and compensation profile that make us potentially vulnerable to an activist approach?  If so, how should we address them with investors?

Authors

Abe M. Friedman
415.906.6501
Lauren D. Gojkovich
212.235.2916
Peter Michelsen
415.906.6517
Derek O. Zaba
415.660.3902