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May 03, 2014
Quality of Corporate Engagement Improved Since Dodd-Frank
    by Robert Kropp

A new report from the Investor Responsibility Research Center Institute and Institutional Shareholder Services concludes that both investors and companies are more satisfied with engagement since say on pay rules were issued.

Three years ago, in 2011—between passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the first year of the Securities and Exchange Commission's rule requiring an advisory vote by shareowners on executive compensation packages—the Investor Responsibility Research Center Institute (IRRCi) and Institutional Shareholder Services (ISS) produced a benchmark survey on corporate engagement.

That reported noted that the above mentioned legislative and regulatory actions helped create an environment in which "issuers now appear to be more willing to engage, while investors have more to gain from engagement.”

Speaking to at the time, Marc Goldstein, study author and head of engagement at ISS, further noted, “We know that sustainability issues aren't going to become less important, and engagement around compensation is only going to increase. We're seeing attempts to tie compensation to the achievement of environmental and social goals."

In part because the impact on engagement of say on pay rules occurred too late for inclusion in the original report, IRRCi and ISS collaborated on a recently published follow-up. Not surprisingly, the report, entitled Defining Engagement: An Update on the Evolving Relationship Between Shareholders, Directors and Executives, found that the level of engagement is at an all-time high. Furthermore, increasing numbers of both investors and issuers report increased satisfaction with the quality of engagement.

“In the three years since our original study – which correspond to the first three years of universal say-on-pay in the US – overall engagement levels are up, and in particular, companies are initiating more engagement with shareholders, as they seek to head off potential opposition to the say-on-pay vote or demonstrate responsiveness after receiving a high level of dissent,” the new report states. “Moreover, corporate directors – especially lead directors and members of compensation committees – are taking part in more engagements, though this is still far from a common occurrence, especially compared to the situation in some other countries.”

However, as IRRCi executive director Jon Lukomnik noted in a webinar, “Engagement has widened out to not just encompass say on pay.”

“Compensation is far from the whole story,” the report states. “Issuers and investors are engaging extensively on merger and acquisition activity; on environmental and social issues; on board structure, director qualifications, and other corporate governance topics; on activism and shareholder proposals – and also on corporate strategy and financial results.”

The report found that both the number of investors and issuers involved in engagement, as well as the number of engagements themselves, have increased since the 2011 report. But as with the earlier report, Defining Engagement notes a distinct difference in definitions between the two parties.

“Issuers are more likely to view engagement as a series of discrete conversations, while investors are more likely to see engagement as an ongoing process,” the report states. Issuers were more likely to consider something as discrete as a single phone call to constitute engagement, while investors saw the engagement process as one that often went on for months. Simply establishing a dialogue was often enough for issuers to consider engagement to be successful, while investors were more likely to point to corporate action in response as the sign of successful engagement.

The report also notes that significant stakeholders continue to have a less than optimal relationship with the engagement process. Retail and other smaller shareowners rely on collaboration involving larger institutional investors in order to make their voices heard in corporate boardrooms. And smaller companies—which, the report observes, “may have been happy heretofore to avoid some of the attention given to their larger counterparts”—often fail to engage with investors “before those concerns erupt in the form of a failed say-on-pay vote or a successful activist campaign.”

Nevertheless, “Both investors and issuers are devoting more resources to engagement, so the level of professionalism of those engagements in up,” Lukomnik noted during the webinar. As a result, “Issuers and investors are both reporting higher degrees of success,” according to the report. “Comments from both groups suggest that participants – especially issuers – are getting better at engagement as they do more of it.”

“Companies and investors are finding ways to talk to each other,” Lukomnik said. “Engagement is functioning in much the way the sculptors of the Dodd-Frank bill intended.”


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