5 Investor Expectations for Shareholder Engagement

We attended Equilar's Board Leadership Forum, an event providing a deep dive and various perspectives on today's critical board processes, from risk management and investor engagement to CEO and director compensation. A full day of panel discussions revealed a common focus: What do investors want to see from boards? How can directors engage more effectively?

We collected a few quotes to highlight key insights from the day's discussion. When it comes to shareholder engagement, here's what investors and proxy advisors have experienced (or hope to see) from boards:

1. You don't need to be an expert, but you must have a plan.

[blockquote source="Drew Hambly, Executive Director, Corporate Governance, Morgan Stanley Investment Management"]I don't expect everyone to be an expert on emissions or climate change, but if you haven't read your own CSR report, then that's a red flag. What's the board doing to stay on top of environmental issues?[/blockquote]

Whether the topic is cyber risk or ESG, investors are less concerned with an individual director's level of expertise than they are the board's comprehensive plan for oversight. Every board may not require a cybersecurity or environmental expert in order to establish an effective oversight process, explained Drew Hambly (Executive Director, Corporate Governance, Morgan Stanley Investment Management). How does your board engage with management on these issues? What's the process for monitoring threats? What's the crisis response plan? When applicable, how does the board work with its external consultant to bolster oversight capabilities?

2. Demonstrate how the board is overseeing culture and human capital.

[blockquote source="Hon. Michael Montelongo, Board Member, Herbalife Ltd."]We hear 'tone at the top', but you also have to be mindful of 'mood in the middle' while monitoring 'buzz at the bottom'.[/blockquote]

In the wake of recent reputational crises like Wells Fargo or United Airlines, boards should be privy to the dangers of ignoring 'mood in the middle' and 'buzz at the bottom'. To minimize activist attention, today's boards must look beyond balance sheets and operations, said Michael Montelongo (Board Member, Herbalife Ltd.). How is the 'tone at the top' being implemented across middle management and the frontline?

Investor want to understand how boards are monitoring culture throughout all levels of the organization ' and how employee incentives align with the company's longterm strategy. 'Visit the field site,' said Montelongo. 'Spend time with the troops. And as you implement good governance practices, document them.'

3. Boards lacking diversity often have other issues.

[blockquote source="Sonia Lurie, Proxy Voting Officer and Investment Operations Specialist, Dodge & Cox"]When we find companies lacking in diversity, there's usually other issues going on. More diverse boards have less of these problems.[/blockquote]

Lack of board diversity is only the tip of the iceberg, investors explained. Boards with little to no women or minorities are showcasing poor refreshment and recruitment practices, which likely means they lack the spectrum of skills necessary to carry the company through the multi-year strategy ahead.

'Almost invariably, where you find a problem at a company ' or a company that's not performing well ' you focus on the composition of the board...,' explained activist investors Greg Taxin in our Board Performance Review series. With many emerging areas of board oversight (e.g., ecommerce, digital marketing, data security), age diversity is quickly becoming another aspect of diversity around which investors are drawing attention.

4. Leave the babysitters behind during engagements.

[blockquote source="Drew Hambly, Executive Director, Corporate Governance, Morgan Stanley Investment Management"]In the conversations when the director comes with lots of chaperones, I find that we're going to have a less productive discussion. If you can come in and have a normal conversation with us, I come away with a lot more comfort as a shareholder.[/blockquote]

During his panel, Hambly echoed what we've heard from investors and proxy advisors several times before: leave the entourage and the 100-page slide deck at home. While several major investors have lauded directors for their willingness to engage, it's now time to improve the effectiveness of those engagements.

'The better engagements I've seen are with one or two directors and maybe one or two executives (without a consultant) having a casual-type dialogue that's pretty frank,' said Bob McCormick, Esq., previously Chief Policy Officer at Glass Lewis & Co. 'We benefit greatly from it because we learn a lot about a particular company.'

5. Enhance and disclose your board evaluation process.

[blockquote source="Michael Garland, Assistant Comptroller, Office of New York City Comptroller"]Directors don't like to tell other directors when it's time to go. Tenure and term limits are only crutches.[/blockquote]

With board composition at the forefront in 2017, investors want to know more about the board's process for self-assessment. Each year, investors and boards are haunted by a recurring statistic from PwC's Annual Corporate Directors Survey: '35% of corporate directors say someone on their board should be replaced.'

The board evaluation is a critical tool for measuring and improving board and director performance, and investors are eager to understand how boards are using it to refresh and realign.

In BlackRock's Engagement Priorities for 2017-2018, the world's largest institutional investor explained its position: 'Board composition, effectiveness, and accountability remain a top priority... We will seek to better understand how boards assess their performance and the skills and expertise needed to take the company through its future multi-year strategy (rather than the last one).'