March 02, 2011
Companies and Shareowners Differ on what Engagement Means
by Robert Kropp
Benchmarking of views on engagement by investors and issuers finds that changes in corporate
behavior is most likely when shareowners are in agreement on an issue.
In a report described as "the first attempt to benchmark engagement, or the dialogue between public
companies and their investors," the Investor Responsibility Research Center Institute (IRRCi)
and Institutional Shareholder Services
(ISS) found "broad consensus that engagement between issuers and investors is common and
increasing," but marked differences between respondents as to what engagement means.
The study, entitled The State of
Engagement Between US Corporations and Shareholders, surveyed a wide range of asset owners,
asset managers, and issuers. Perhaps as a result of efforts to include voices from such a diversity
of respondents, the study reveals a wide range of opinions on the subject of engagement.
Marc Goldstein, head of research engagement for ISS and author of the report, told
SocialFunds.com, "We tried to get a representative sample of issuers and investors." Respondents to
an online survey included 161 institutional investors and 335 issuers
based in the US, and ISS
followed up with in-depth telephone interviews with 21 investors and 22 issuers.
example of the complexity of approaches to engagement, Goldstein pointed out that "Small investors
just don't have the resources available to engage as CalPERS or TIAA-CREF do. Large institutions that own a significant
percentage of companies have a powerful incentive to engage, not just talking to the IR departments
but with the boards."
Nevertheless, the report did find that a power shift in engagement
has occurred in recent years. As Goldstein pointed out, "The financial crisis damaged the
credibility of corporations. Boards could no longer say, trust us, we know what we're doing.
There's powerful evidence that boards did an inadequate job of risk management. The credibility
issues as a result of the financial crisis have led to legislation giving even more power to
Legislative initiatives such as the Dodd-Frank Wall Street Reform and
Consumer Protection Act, as well as subsequent regulatory actions by the Securities and Exchange
Commission (SEC) such as enhanced disclosure requirements and mandating corporations to permit
advisory votes on executive compensation, have created an environment in which "issuers now appear
to be more willing to engage, while investors have more to gain from engagement," according to the
"Another reason for the power shift is that shareholders have been fighting for a
long time to get companies to adopt majority voting for directors," Goldstein added.
However, the report also found that the question of what constitutes engagement received
markedly different answers from companies and investors. "A lot of issuers still think of
engagement as picking up the phone and calling their top ten investors every time a quarterly
financial report comes out," Goldstein said. "They prefer to have conversations with portfolio
managers about strategy and performance, and are not happy to talk with corporate governance or
proxy voting specialists about board leadership or compensation."
He continued, "Investors
say a typical engagement lasts a month or more, and issuers say a week or less."
to the report, "Engagement is most likely to lead to concrete change by issuers in areas where
shareholders are broadly in agreement, such as declassification of the board of directors or the
elimination of poor pay practices, than in areas where shareholders' views diverge, such as the
need for an independent board chair."
"Majority voting is one example of an issue about
which shareholders are in broad agreement," Goldstein said. "Separating the CEO and Chair
positions, on the other hand, is not in this category, although a lot of investors say they're in
favor of it. But votes in favor of shareholder proposals on the issue tend not to be so high."
When SocialFunds.com spoke last year with Julie Tanner, Assistant Director of socially
responsible investing (SRI) at Christian
Brothers Investment Services (CBIS), she expressed disappointment in the recommendation to
institutional investors by ISS to vote against a shareowner resolution calling for the separation
of CEO and chair at Goldman Sachs, observing that the proposal could have received as much as 15%
more support if ISS had recommended a vote in favor.
Asked about the position of ISS on
the issue, Goldstein said, "We like the concept of separating the positions, but we are willing to
make exceptions in cases when companies can demonstrate that there is a robust independent lead
director. When you combine the Chair and CEO, you need a strong counterweight to that."
Investors and issuers alike reported that the number of issues addressed through engagement is
increasing, and to a degree the greater specificity of engagements relating to environmental and
social issues have contributed to the trend. As the study reported, "The director of CSR for an
asset owner noted that the issues of concern to her constituents had become more specific – for
example, moving from sustainability generally, to issues such as hydraulic fracturing – requiring
her to have more engagement with issuers on specific topics."
Goldstein said, "Nearly half
of asset owners said that when they request engagement with an issuer, they talk about
environmental or social issues. For asset managers, the results weren't nearly as high."
"We know that sustainability issues aren't going to become less important, and engagement
around compensation is only going to increase," he continued. "We're seeing attempts to tie
compensation to the achievement of environmental and social goals."
The report pointed out
that a lack of resources was most often cited by asset owners and asset managers as an impediment
to effective engagement. Goldstein said, "The need for engagement isn't diminishing, and until the
market improves enough that mutual funds can hire more staff, we're likely to see more attempts to
share the burden."
"The fact that investors consider engagement to be important but find
resource restraints suggests that we may see more attempts to share the burden by engaging
collectively," he continued.