Political pressure and regulatory change pose a challenge to IR and governance teams
Shareholder engagement remains a top priority for companies navigating today’s complex capital markets. Proactively engaging key shareholders allows companies to communicate their long-term strategies, explain operational decisions and develop and strengthen relationships with this key stakeholder group. This need for engagement has only grown amid unstable economic conditions, including supply chain issues, inflation, tariffs, trade tensions and related market volatility.
Recent anti-DE&I and anti-ESG movements, executive orders issued by the new US administration, changing proxy advisory firm policies and renewed efforts by shareholder activists all underscore the need for proactive engagement with key shareholders. In addition, new SEC guidance related to the use of Schedules 13D and 13G has changed how large institutional holders engage with companies, impacting how meetings are structured and increased the need for companies to proactively engage with these shareholders.
Engagement also puts the company in a better position if an activist comes calling or initiates a ‘vote no’ campaign, or if it receives a shareholder proposal for consideration at the next annual meeting. Vote no campaigns have gained popularity among activists who view the shareholder proposal process as inadequate for expressing dissatisfaction with the board or a particular committee chair.
Due to the rise in these activities, the necessity of building and maintaining a relationship with these important investors that will support the company particularly during these unpredictable times can’t be over-emphasized.
The shareholder engagement process has two components. The first is the ongoing regular connections typically run by the IR team with buy-side analysts. This part of the process includes the conversations with analysts during the quarterly earnings calls and at investor conferences, as well as providing detailed quarterly reports to shareholders. These efforts are an integral part of the IR team’s activities and often involve the CEO or CFO.
The second component of the engagement process includes the interactions between the corporate secretary or legal group and the stewardship team at the large funds that own stock in the public company and possess the ability to vote a significant portion of the shares at the company’s annual meeting of stockholders. This shareholder group typically includes funds like Fidelity, BlackRock, State Street, T Rowe Price and Vanguard. Depending on the topics, the company’s conversations with the fund’s stewardship team can include certain board members, as well as members of the IR team.
Developing relationships with key investors and providing transparency into the company’s strategy and other important decisions are essential in the event of an activist shareholder attack, a vote no campaign or a shareholder proposal. In contested situations, these relationships can make the difference between board stability and disruptive change, as supportive investors are likely to back management if they trust the company’s narrative, strategy and intentions.
In order to make these engagement discussions as effective and successful as possible, it is important to prepare carefully for each investor, tailoring the company’s approach based on their priorities, policies and voting history.
Focusing on the issues
Before having a conversation with key investors, it is important to know what issues or topics are important for them. All large funds publish stewardship guidelines and voting policies, which should be reviewed and mapped against the company’s current practices before prior to any engagement discussions. Failing to do so risks wasting valuable time and eroding your credibility.
Directors generally do not get involved in the preparation of the company’s proxy statement, but it provides a wealth of information for investors. Directors and other company officers participating in these meetings need to be briefed on proxy disclosures, as well as issues and other matters important to these investors, as well as investor positions on key issues impacting the company.
This is even more important today given the February 2025 SEC staff guidance related how institutional investors engage, which has formalized interactions between companies and these large funds and heightened scrutiny over any perceived effort to influence corporate control, making careful messaging critical and forcing investors to emphasize their passive role to avoid having to file a longer form Schedule 13D to report holdings.
It is also important to determine whether the fund makes voting decisions based on recommendations from proxy advisory firms like ISS and Glass Lewis or whether they consider the proxy advisor firm recommendations and make their own voting decisions on proposals. Knowing this information informs whether the company’s engagement team should address proxy advisor concerns directly or focus on broader strategy and governance. This information can typically be provided by the company’s proxy solicitor or other engagement advisor. The larger funds typically consider the reports prepared by the proxy advisory firms but rely on their own guidelines and the specifics of a company’s situation, which is a nuance many companies underestimate.
Preparing to engage
The proxy statement provided to shareholders was historically viewed primarily as a disclosure document required to comply with SEC requirements. Over the years, the proxy statement has become a key means of strategically communicating with shareholders. If drafted effectively, it not only meets compliance requirements but also provides the necessary transparency regarding the company, the board oversight and refreshment process, and the company’s performance narrative, all of which investors seek. The company directors and other company engagement team members participating in these discussions should know what is in the proxy statement regarding key issues to be discussed.
The proxy statement also provides the opportunity to showcase what the company has achieved and plans to do in critical areas like executive compensation, board refreshment, corporate social responsibility, governance, risk oversight and long-term strategy. The information in the proxy statement and related investor-facing materials should be reviewed thoroughly before engagement, as this information generally forms the starting point for discussions. This is important to note given the change in the SEC’s interpretation related to investor engagement.
These changes in engagement protocols have forced companies to proactively provide data and disclosures to align with investor expectations during these discussions. Controversial topics like ESG and climate change initiatives, as well as DE&I policies, may be considered off limits for the fund to raise but it doesn’t mean that the fund is not interested in these topics. Just because the fund may not ask about these topics does not absolve the company from proactively addressing risks in a way that demonstrates foresight and governance maturity.
It is helpful to carefully select an engagement team based on the agenda and the investor’s concerns. Attendees can be members of the corporate secretary group, IR team and the chair of the compensation committee if there is a perceived disconnect over pay for performance, for example. Participation by the committee chair responsible for governance matters is also important if there are governance matters that will be discussed.
These meetings are also an opportunity for the company to gather actionable feedback on disclosures and governance practices. Frequently, funds may indicate disclosures or enhancements to disclosure that can improve transparency and credibility: memorializing these comments ensures they are considered and incorporated effectively.
A quick run through a list of topics and questions and who will address or answer them is always a helpful exercise. Set out ahead of time who is going to respond to what topics and questions during the meeting so that everyone can be prepared as possible and the company can speak with one voice, avoiding contradictory or incomplete answers. It is also appropriate to indicate that you will follow up with the shareholder if there is a question that the engagement team is not in a position to answer during the meeting. It is helpful to have someone documenting what is said so that the speakers can focus their attention on the conversation and the points made are clearly recorded. These insights can be extremely helpful when drafting the proxy disclosure or when the IRO is speaking with portfolio managers regarding company initiatives in the future.
Timing and simplicity matter
For most companies, the pressure to prioritize engagement peaks during the month to two weeks before the annual meeting of shareholders and after the proxy materials have been mailed to shareholders and filed with the SEC and the proxy advisor recommendations are in hand. Limiting engagement to this window is a mistake, however: it leaves little room to build trust, address concerns constructively or influence perceptions outside of immediate voting decisions.
Engaging outside of the proxy season signals to investors that the company cares about what its investors think enough to engage with them when there is no pending solicitation of votes. Building relationships with investors is extremely helpful when seeking support during proxy season for critical proposals or when defending against an activist.
The focus of the conversation should be on a few clear, strategic themes or points that align with investor priorities and the company’s long-term vision. Boards and management should approach engagement with an open mind and as a two-way dialogue, both to educate investors on the company’s perspective and to actively listen to investors’ concerns and insights. A company will only get approximately 30 minutes with the fund, so discipline is key: avoid jargon, anticipate tough questions and stay focused on what investors care about most.
Engagement should be viewed as an ongoing governance discipline: it’s not just a seasonal tactic to secure votes, but a long-term investment in trust and credibility with the company’s most influential stakeholders. Each company’s approach to engagement with shareholders should reflect a company’s unique characteristics and culture, as well as the issues and topics that will be discussed at the engagement meetings.
Leading companies recognize that engagement is both an art and a discipline: honed through preparation, humility and consistent execution gain the most from the engagement process.
Jane Storero and AJ Patterson are consultants in Aon’s executive and board advisory practice specializing in assisting clients in perfecting the art of engagement and developing strong and lasting relationships with key stakeholders.
