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Corporate Governance

SEC Staff Announces Fall Roundtable on Proxy Process

The SEC staff has announced that they will be hosting a roundtable event at some point this Fall to collect comments and feedback from investors and market participants about possible refinements to the SEC’s proxy rules. The potential topics for consideration include: Voting Process, Retail Shareholder Participation, Shareholder Proposals, Proxy Advisory Firms, Technology and Innovation, and Other Commission Action.

Click here for the SEC’s official announcement.

The New Norm: Engagement

In the world of governance, you are often an outlier by virtue of what you are not doing, rather than by what you are. This is most certainly the case with proactive shareholder engagement.

There is an expectation from investors for companies to proactively engage, with 81% of respondents to a CGIC investor study stating this is an important process.

Blog engagement graphic 1

The largest institutions, especially passive funds, place the most value on direct engagement and set the highest expectations for this to occur. As we have commented previously on the blog, many have clearly disclosed practices and procedures to enable them to maximize their time and issuers to understand the importance of this in their view.

Blog engagement graphic 2

If you have not started to plan your off-season engagement, now is the time! Investors can struggle with bandwidth issues, so you need to plan ahead to try to get time on their calendar. You may also want to avoid blackout periods, such as around earnings and investors days. The perception that all companies should engage all investors all of the time is neither accurate nor realistic. But what is the right balance and how can you elevate your process to ensure you are meeting internal and external expectations?

Unless you are an outlier with existing governance or compensation concerns, or believe you may have down the road, you need to understand the issues that are motivating to each investor. Detail agenda items that are appealing and relevant to them in order to encourage the investor to take the meeting. A simple response of, “Thanks, but we’re OK right now,” isn’t always the worst thing, but as the exercise is to eliminate doubt, gather vital feedback, and to establish and strengthen relationships, especially with passive funds and larger investors in general, it is best to do everything possible to avoid this response.

The main questions to consider as you plan your strategic outreach and look to maximize your effectiveness are:

  1. Which investors am I going to reach out to first?
    • Just top—10/20?
    • Are there investors further down my registry that I should contact, and why?
  2. What about passive investors?
    • Are there special considerations for engaging passive investors?
    • What role does IR play here?
  3. Who are the right people for me to contact?
    • Is it just the governance or proxy contact?
    • What role does the PM or analyst play?
    • What is the real impact of ISS and Glass Lewis?
  4. Who is on my engagement team?
    • What is the role of IR, legal, Corporate Secretary, etc.?
    • Do I need representatives from other areas, such as Comp and Benefits, or Sustainability?
    • What role do my directors play?
  5. What is my message?
    • Is it just the same as last year? Is that appealing to my investor?
    • What are important issues for my investors, have their policies changed?
    • What are general “hot topics” right now and how can I approach them?
    • What are my specific strengths and challenges as perceived by my investors?
  6. ESG
    • What role does ESG play in this?
    • What is my message on Corporate Responsibility?
    • How do I rate relative to investor concerns, my peers and my sector?
  7. Consistency
    • How should I maintain a consistent message in my proxy disclosures?
    • Should some of this information be included in other investor communications/materials?
  8. Internal communications
    • How do I communicate my strategy to senior management and the board?
    • What expectations should you have for the process and how do I manage these internally?
    • Are their additional items to consider, such as activism?

We don’t need to overcomplicate this process, but with proper planning, we can create a refined strategy to ensure that you are achieving your objectives and delivering a strong, consistent and clear message to all investors.

We are here to partner with you to help answer these questions and meet these challenges.



Poison Pill Adopted Against Founder of Papa John’s

On Sunday, Papa John’s board voted to adopt a poison pill in attempt keep founder John Schnatter, who stepped down as the board’s chair, lost privileges to his office at the company’s headquarters, and was removed from some marketing materials after using a racial slur during a conference call in May.

The poison pill adoption comes at a time when, Schnatter, who has reversed course and lawyered up, is intimating that his personal attachment to the brand and 29.4% stake in PZZA won’t go out without a fight.

In the wake of this turmoil, the company’s stock has seen a sharp decline. Following Schnatter’s resignation on July 12th, the stock has dipped 9%.

FRC Publishes Revised UK Corporate Governance Code

The Financial Reporting Council has published the 2018 UK Corporate Governance Code and revised Guidance on Board Effectiveness. These reports come in response to the feedback that the FRC received after consulting over 275 correspondents in December 2017. So far, the revised code has received mixed reviews, as some have applauded its vision, while others are concerned that the changes offer little in the way of significant reform. While this may be true in some cases, the following changes highlight important updates from the 2018 Code.

Significant Votes Against: The FRC has maintained its proposed requirement for significant shareholder votes against a board-proposed solution. Under this requirement, the board must provide an update in the following six-month window, following a 20%+ shareholder vote against a board resolution.

Culture and Values: Corporate culture has been upgraded from a Provision to a Principle in the new code, further enhancing the focus on a company’s culture. The board must ensure that the company’s policies and practices are consistent with their values and help attain long-term success.

Overboarding: In response to growing concerns regarding multiple directorships, the 2018 Code has revised its wording in relation to overboarding risks. This revision aims to encourage boards and directors to carefully consider the time commitments and constraints that come with multiple board directorships.

Assessment of risk: The 2018 Code expanded on its previous risk policies to include “emerging risks” in the discussion. While the former guidelines called current risk assessments in company procedures, the new version of the Code incorporates the need to address emerging risks and the procedures that are in place to identify and manage them over time.

Role of Remuneration committee: The consultation draft proposed new responsibilities for the remuneration committee, calling for them to oversee remuneration and workforce policies. Due to workload concerns, the 2018 Code limits the changes to the remuneration committee to review workforce remuneration policies and the alignment of incentive/rewards with company goals.

While many see these changes as steps in the right direction, numerous companies have not held back in calling for further change. EdenTree Investment Management, for example, has labeled the 2018 Code as a “missed opportunity.” Neville White, head of socially responsible investment policy and research at EdenTree, stated, “The long-awaited review of the UK corporate governance code by the FRC appears to offer little in the way of significant reform and may add to the tide of criticism against the FRC as being too timid.”

The Year of the Activist

A further example that mega market cap no longer serves as a moat to external investor pressure and agitation even in the extant bull market. According to Lazard’s 2018 First Half Review of Shareholder Activism, investors globally spent $40 billion targeting 136 companies thus far. This is an effort to gain board seats, oust the CEO and push for spin offs, respectively. Simultaneously, pensions and passive funds are supporting.

Now is the right time to make sure management’s strategy and the company’s governance is intact and resonating with your investors.  Engage your investors in sunny days, don’t wait for the storm clouds to appear on the horizon and allow an activist to engage your holders first.