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GRC trends and insights

Shareholder engagement policy in corporate governance

March 15, 2019
0 min read
Picture of a boardroom representing shareholder engagement

In recent years, shareholders have been dissatisfied with management and certain corporate governance practices, which has led to an increase in shareholder activism. As corporate governance evolves, shareholders are gaining more power to elect their choice of board directors. Until recently, shareholders have largely been dissatisfied with their communications with the board and management. Some shareholders feel that contact with board directors and managers once a year is simply not enough, and that discussions during that time are impersonal, outdated and not meaningful. In an effort to be heard, shareholders are attempting to reshape traditional investor communications and relations.

According to the Institutional Shareholder Services, the majority of corporations in the United States had some form of majority voting and annual elections in 2015. This is a telltale sign that U.S. companies are becoming more proactive.

Activist demands can force companies to expose information that's not beneficial to them or the companies for the short or long term. There's a trend toward establishing a two-way effective communication structure between companies and their shareholders to ensure that both sides are happy. As a way of formalizing these changes, U.S. companies are starting to adopt bylaws that formalize processes for shareholders to present their dissatisfactions or concerns.

What Is Shareholder Engagement?

Shareholder engagement is a method for the shareholders to communicate their views, concerns, ideas and opinions to the board of directors and managers. Simultaneously, it gives the board of directors and managers an opportunity to communicate their perspectives on things.

Just about any form of communication between shareholders and leaders is acceptable. Some of the more common methods are:

  • Shareholder votes
  • Written consent
  • Proxy statements
  • Annual General Meeting discussions
  • Quarterly analyst and investor meetings
  • One-on-one meetings
  • Communication in the annual report
  • Presentation of a corporate social responsibility report by the company
  • Announcements on the company website

Hot topics between corporate leadership and shareholders are corporate governance issues, corporate strategies, risk management and executive compensation, or any other topic that shareholders bring to the board's attention.

Why Should Corporations Implement a Shareholder Engagement Policy?

In general, formal written policies help to get everyone on the same page. They set the ground rules by which everyone must abide.

A shareholder engagement policy outlines formal guidelines for companies to interact and communicate with shareholders. In addition, formal policies provide guidance for boards and managers on how best to deal with activist shareholders. Shareholder engagement policies outline the methods of interaction and the types of topics in which both parties may engage. Formal shareholder engagement policies go a long way toward facilitating effective communication between shareholders and the leadership.

Current Issues With Shareholder Engagement

Boards have been increasingly aware of the rise in shareholder activism, and it's creating pressure on boards to respond to shareholders in some fashion. According to the National Association of Corporate Directors (NACD), over 20% of listed companies were approached by an activist shareholder in the years 2015-2016. In 2015, less than half of the boards surveyed didn't have designated plans to respond to activist investors.

Boards of small-cap companies indicated that they faced pressure from activist shareholders more often than large-cap companies. As indicated by 44% of the responses of small-cap companies, they were more likely to take the approach of assigning a board director to meet with institutional investors in person at least once a year. Only small numbers of small-cap companies established some type of protocol for addressing shareholder inquiries and pressures.

By initiating some type of interaction between leaders and shareholders, leaders have the opportunity to open up discussions about how their short-term goals will affect their long-term goals. Periodic discussions between shareholders and leaders also prevent the potential consequences of board decisions of which shareholders aren't aware.

Implementing a Shareholder Engagement Policy

As shareholder engagement policies are relatively new, boards should consider taking a methodical approach to developing and implementing a shareholder engagement policy.

First, boards need to identify the most appropriate internal stakeholders and to assemble a committee. The committee should be diverse in knowledge, and perhaps, include a member from the human resources department. The committee should also include members of management, corporate executives and a member of the board of directors.

Next, the board should carefully select which investors with whom they want to engage. Formal board policies will outline the methods, topics and frequency of communication, so that all parties are on the same page. To be effective, shareholder engagement should foster broad participation among shareholders and be ongoing. Boards should strive to maintain the dialogue between the parties once it's been opened up.

Virtual meetings are gaining in popularity as boards discover that they are a cost-effective, practical way to broaden shareholder participation.

Concluding Thoughts on Shareholder Engagement Policies in Corporate Governance

Despite the traditional relationships between board directors and shareholders where communications about leadership and strategy were off-limits or nonexistent, corporations are learning that increasing shareholder engagement offers benefits for everyone. Respectful communications give shareholders a better understanding of the company's viewpoint and perspectives. Similarly, company representatives gain a better picture of the diverse views of the shareholders. They're often happy to serve as a source of advice.

Diligent's board portal system coupled with Diligent's Nom Gov solution provides a secure platform for boards of directors to collaborate and communicate on plans for the best approach to creating a shareholder engagement policy. The board portal offers a confidential space for creating a shareholder engagement policy, developing a plan for communicating it to shareholders and amending it as necessary. Boards should put much thought and consideration into shareholder engagement policies so that they're sure to benefit the board, senior executives, managers and the shareholders. Shareholder engagement agreements should be clearly stated, concise, well-organized and easy to comprehend.

When it's been well-planned, the end-game of a shareholder engagement policy will result in the transparency and accountability of the board and executives. The results should translate into enhancing management's credibility and increasing the goodwill and trust between all parties. Overall, the evolution of increasing shareholder engagement will enhance good corporate governance.


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