Issue 6 - December 2011
New Investor Power - continued
To rebuild investor confidence and build support for the transformation story, Dow launched an investor engagement program. Milestones for execution were laid out, and as each one was met, Dow communicated to investors that it was following through on its near-term strategic objectives and executing ahead of schedule. As performance strengthened, the company expanded its dialogue with investors and the media to include the more innovative aspects of the company’s transformation and to highlight the growing investment and value of its R&D portfolio, which long-term would play a major role in the company’s transformation. To ensure that Dow’s message was resonating with investors, the investor relations team regularly measured the impact of its communications on different stakeholder groups and refined the message when needed. The team also provided greater transparency through more detailed operating information, access to more of the company’s leadership and use of more pervasive, digital communications methods. Dow ultimately succeeded in restoring investor confidence — its stock price recouped the losses of late 2008, and 87% of Dow’s shareholders approved of the company’s executive compensation, a strong endorsement.
Few companies manage investor sentiment as well as this, and yet many could easily do much better. In our experience, companies that build investor confidence and manage their concerns follow these practices and recommendations:
Understand the Company’s Points of Vulnerability
The 2011 proxy season provided a number of indicators of what investors view as good practices regarding compensation. Highly desired: transparent disclosure of how compensation is determined, performance-based compensation and longer vesting periods. Large severance payments and “golden parachutes” are objectionable (McCahery and Suatner, Tilberg University research paper). Ahead of the next proxy season, companies should analyze their compensation plans to identify disconnects between pay and performance and identify best practices.
Understand the Composition and Sentiment of the Shareholder Base
It is critical to know which shareholders are influenced by proxy advisers. Companies should target new shareholders who have a history of filing proposals or who take social issues into account when investing; in particular investor classes most likely to take their governance grievances public, such as socially responsible investors; activists; foundations; faith-based organizations; special interest groups; and state, municipal and union pension funds. Companies can also revisit the 2011 votes to identify the active shareholders and determine where the company’s responses were weak.
Work with the proxy advisers
If a company received a negative recommendation on SOP from the proxy advisers, it should consider engaging with them during the off-season to make its case. Companies subjected to inappropriate peer group comparisons, incorrect compensation calculations or any other inaccuracy should attempt to resolve the issues. An early resolution or correction is less stressful than tackling the issue during proxy season.
Engage Shareholders
Companies should engage shareholders and stimulate a dialogue on policy changes and the reasons driving them. Management should put mechanisms in place to hear investor concerns and respond with communications that explain decisions and demonstrate that it listens to investors. If shareholder sentiment on an issue is strong and broad-based, management should consider changing policy.
It is important to know how shareholders evaluate performance. In our research we have found that investors prefer measures related to value creation and executive stewardship, such as return on invested capital and free cash flow generation. They are less interested in earnings per share or overall growth statistics. This may not apply to all shareholder bases, but it pays to ask the question.
Shareholders have spoken. They want to vote on SOP every year. As proxy season approaches, companies need to articulate their compensation strategy and how pay is determined. The proxy is the selling document. It should present the case completely to avoid additional filings. Supplementary filings can be perceived as evidence of shareholder resistance.
Be Prepared
Proxy season is not the beginning and end of a company’s engagement with its shareholders. It is a point in time that reflects the effectiveness of management’s relationship with its investors.
Even now shareholder advocates are working to exploit the shifting balance of power and taking on more corporate governance issues. They are using the off-season to shape the discussions and air their side of the debate. If companies wait until the 2012 proxy season to air their positions, they could very well find themselves scrambling to respond to concerns that have been festering for months.