Published by Wanda Rich
Posted on December 22, 2022
By Patrick Yau, Managing Director of Strategic Investor Relations, Edison Group
Patrick Yau
In recent years, shareholders and boards of publicly traded companies have increasingly invited mutual dialogue. This trend is part of a new paradigm in corporate governance in which technology has been increasingly relied upon to bring greater transparency, accountability, and shareholder input. Yet despite the uptick in digital communication, the outcome looks to be one of mutual frustration at a process falling short of expectations.
A few decades ago in the pre-digital age, there was an acceptance among shareholders that transparency, accountability and having a say in the business was not for them. All parties seemed to know their place and were for the most part happy with it. Shareholders rarely went to annual general meetings and proxy votes were largely ignored, with voting was essentially a rubber-stamping exercise.
That has all changed. New technology has improved efficiency, and theoretically at least should have improved the board-shareholder relationship. But a recent report titled the ‘State of Stewardship’ shows that any progress made is at best underwhelming.
AGMs and shareholder voting still overwhelmingly run according to the board’s recommendations and playbook. Most AGM resolutions get passed by 95% or more, suggesting a lack of debate or scrutiny. Rarely are votes that one-sided. It points to a problem that exists, at least in part, in the communications between companies and shareholders, and can lead to poorer business performance and weaker investor returns.
A two-pronged solution is clearly needed: first, an overhaul of existing technology replaced with real-time digital communications; the availability of real-time digital communications opens up the door to a more frequent and robust stream of communication, allowing for greater investor voice in business decisions. Of course, this cannot be done in a silo. A shift in the Board’s AGM playbook – in terms of the processes behind the running of them – are also needed. Technology might have a role to play in making voting on issues more efficient, but it is only the tip of the iceberg. In an environment increasingly marred by market volatility and the outsized influence of a few short-term oriented actors, shareholder voice plays an increasingly important role when it comes to maximising long-term value and creating sound corporate governance practices. Without an improvement in the cadence and exposure of Board members to investors, having a more efficient method of communication is only one piece of the puzzle.
State of Stewardship report reveals flaws
The ‘State of Stewardship’ report, published in November, notes the rise of “passive” index-tracking funds and fewer investment portfolios allocating to UK equities. This trend has led to less time being spent engaging with and examining UK-based portfolio companies. This is often to the detriment of investor interaction and best practice.
The report also highlights the growing use of third-party proxy voting agencies by institutional investors. It’s an approach that may be cheaper and more convenient for time-poor asset managers and other institutional investors, but companies say these agencies deliver work of variable quality and are often hard to engage with.
That said, most AGM decisions are straightforward and uncontentious, such as declaring a dividend, reappointing the auditors and share buybacks. Eyebrows become raised and questions are asked on issues such as executive pay, appointments, and re-appointments. When AGM decisions don’t go their way, it’s possible company board members find it easier to attribute it to the less engaged proxy voting agencies.
What no one questions is that effective, real-time digital communications between a company and its shareholders can reduce the pressure of very fast turnaround-times for investor decisions. Making the process easier would reduce the need for third-party proxy voting agencies.
Other third parties can play a part too. Edison Group, for example, has expertise in building investor outreach programmes and is well positioned to take non-executive members out to see investors as well as the usual CEO/CFO/IRO roadshows. With a wealth of experience in investor relations communications, Edison Group has also successfully demonstrated expertise in building investor outreach programmes for companies, and is well positioned to facilitate effective dialogue between investors and members of the board.
Activist investors good for shareholders
The cautious approach of companies towards investors perhaps reflects some anxiety about investor activism, which has grown noticeably in recent years. Activist investors look for companies they consider to be mismanaged and therefore undervalued, and then buy a large stake to enable them to change the way the business is run. An activist investor can be a wealthy individual, but more often it is a private equity firm or hedge fund.
The changes such an investor makes can include replacing the company’s leadership. To do so, however, an activist investor would need the support of other major shareholders. The latter are generally passive investors, such as pension funds, so they only need to persuade a few individuals.
From both a company and a shareholder perspective, activist investors are not necessarily a threat to the business. After all, what they all have in common is a desire for the business to grow and be more profitable. There is plenty of evidence showing that activist investors improve performance and, in some cases, are represented on the board to the benefit of the company.
With investors increasingly purpose-driven, in particular around environmental, societal and governance (ESG) issues, including net zero emissions targets, the need for greater transparency and accountability looks set to grow. This is an opportunity for companies to showcase what they do and to create investor engagement programmes around their ESG credentials. In some cases responsibility for implementing and monitoring ESG initiatives can fall to one of the non-executive directors or a Chief Sustainability Officer, who may also lead this dialogue with investors.
It is clear both technology and the processes around investor communications is no longer fit for purpose, lacking transparency and failing to bring companies and their shareholders closer together. We at Edison have seen how some of the antagonism between companies and their shareholders could easily be avoided with better communication from all parties. With a new paradigm of shareholder democracy must come changes in the way boards and shareholders communicate. As representatives of shareholder interest boards should look to engage more directly with their investors, accommodating requests for more consistent communication. Expedited by the availability of new proxy voting technologies, an overhaul in the “what, when’s and how’s” of stakeholder dialogue should be embraced in order to build a more productive relationship. Constructive dialogue and transparent debate will fuel shareholder democracy, benefitting both investors and companies in the long run.
(1) https://www.ft.com/content/ad1a85be-11a4-40c2-ba1a-ad7b01a08556
(2)https://www.sharesoc.org/ investor-academy/advanced-topics/general-meetings/voting-general-meetings/
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