On shareholder engagement
Some ongoing corporate governance concerns
It has been a while since I contributed to OUP’s corporate governance blog, which I share with Professor Chris Mallin. So I thought that, rather than focusing on a single theme, I would comment on issues that are currently concerning directors and their professional advisers around the world.
In particular I will address shareholder communication, shareholder engagement, executive compensation, cyber security, and the challenges of cronyism and corruption.
On shareholder engagement
Few institutional investors in the United States involved themselves directly in the governance of companies in which they invested prior to the failure of Enron, Waste Management and others in the early 2000s, and the collapse of Lehman Brothers and the bailout of financial institutions a few years later. Subsequently many felt the needed to be more committed. Many commentators also urged them to do so.
Involvement by shareholders in corporate matters can take many forms, for example:
- submitting resolutions for decision at shareholder meetings;
- rigorously voting shares at every opportunity;
- campaigning on company matters though the media;
- lobbying corporate regulators on company issues;
- initiating a dialogue with the company.
Recent topics for shareholder engagement in the US and the UK have included:
- alleged excessive levels of executive compensation;
- executive incentive schemes that emphasize short- term performance;
- de-emphasizing quarterly earnings to swing the strategic focus from short-term to longer-term;
- calling for information on longer-term corporate strategies;
- separation of the roles of chief executive and board chairman (still combined in some US corporations);
- the composition and diversity of the board.
Recent surveys by IRRC, the Investor Responsibility Research Center in the United States (2011, revised 2014) reported that the level of engagement between investors and publicly-traded U.S. corporations had reached an ‘all time high.’ By ‘engagement’, the IRRC survey meant ‘direct communication between the corporation and investors on specific topics’.
Companies, it seemed, tended to view shareholder engagement as a series of discrete conversations. Investors, on the other hand, saw it as an ongoing process whose success depended on subsequent concrete action by the company.
Companies said they were devoting more resources to shareholder engagement, often through an executive team, with investment relations officers and representatives of the CFO and the Corporate Secretary. In some cases, directors were personally involved, including the board chairman, the senior outside (non-executive) director, and the chairmen of the board’s audit or compensation committees.
The IRRC report concluded that ‘evidence suggests that overall engagement levels will continue to trend upward, as investors seek to better understand, and mitigate risks at companies they intend to hold for the long term, while issuers seek to win support for company proposals, ward off activists, and keep shareholders happily invested in the stock.
A recent development (press reports March 2016) has been major institutional investors, such as Blackrock, Fidelity, and Schroders forming an Investment Association to engage with companies, challenging poor performance, excessive pay deals, or calling for information on longer-term corporate strategies rather than emphasizing quarterly results. This potential of ‘collective engagement’ increases the power of large shareholders to hold companies to account.
The pioneers of shareholder engagement were radical groups and religious organizations who used their shareholder votes to encourage change in corporate policies such as trading in weapons, tobacco, or alcohol. The movement to encourage corporate social responsibility followed, seeking to align business practices with desirable societal expectations in the interest of all stakeholders affected by the business activities.
Some writers argue that the more a company engages with its stakeholders, the more socially responsible it must be and the better its chances of long-term sustainability and improved shareholder value. However, research on the topic has challenged that notion. More reporting does not necessarily lead to better relationships. Many other factors influence interactions between companies and their investors.
 Greenwood, Michelle, Stakeholder Engagement: beyond the myth of corporate responsibility, Journal of Business Ethics (2007) 74:315-317, Springer
Bob Tricker, May 2016
(for more on Professor Tricker’s publications and videoed lectures see www.BobTricker.com)