The first comprehensive analysis of the engagement between investors and public U.S. corporate issuers finds a notably high and increasing trend of engagement. Yet, there is a disconnect between investors and issuers in basic areas such as the time frame of engagement, the definition of a successful engagement and, by implication, what engagement itself means.
“The State of Engagement Between U.S. Corporations and Shareholders,” commissioned by the IRRC Institute and conducted by Institutional Shareholder Services Inc., reveals that engagement is either a priority or a non-event for investors: asset owners and asset managers were most likely to report either that they had engaged with more than ten companies in the previous year, or that they had not engaged at all.
A power shift is underway and issuers are now more willing to engage. Nearly nine out of ten public companies report having had at least one engagement with its investors during the prior year. Previously, routine engagement referred to quarterly discussions about earnings and corporate strategy that occurred in company-designed forums such as conference calls and analyst meetings. Today, engagement has become a year-round exercise involving dialogue on topics such as executive compensation, boardroom independence, and sustainability through a variety of channels including conference calls, meetings, e-mails, public announcements, telephone calls, and regulatory filings. The report’s key findings are as follows:
- The level of engagement between issuers and investors is high. Approximately 87% of issuers, 70% of asset managers and 62% of asset owners reported at least one engagement in the past year.
- The level of engagement is increasing. Some 53% of asset owners, 64% of asset managers, and 50% of issuers said they are engaging more. Virtually none of the investors and only 6% of issuers responded that engagement is decreasing.
- Amongst investors, engagement is either a priority or a non-event. A bimodal, or “barbell,” distribution was evident, with 28% of asset owners and 34% of asset managers reporting engagements with more than ten companies. On the other hand, about 45% of asset owners and 43% of asset managers indicated they did not initiate any engagement activity whatsoever.
- Despite the headlines that result from high-profile conflicts between issuers and investors, the vast majority of engagements between issuers and investors are never made public. About 80% of issuers said most engagements remain private, as did 72% of asset owners and 62% of asset managers.
- Asset owners, asset investors, and issuers do not always agree on what constitutes “successful” engagement. While all three groups believed constructive dialogue on a specific issue was a success, issuers were materially more likely than investors to think that establishment of a contentious dialogue was a success. An even more dramatic difference was that about three quarters of both asset managers and asset owners defined either additional corporate disclosures and/or changes in policies as a “success” while only about a third of issuers agreed.
- 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.
The study was conducted as an online survey of approximately 161 institutional investors and 335 issuers based in the United States from March to May 2010, followed by in-depth follow-up telephone interviews with 21 investors and 22 issuers in August and September 2010. For each respondent, the level of engagement was assessed in terms of subject matter, frequency, participants, measurements of success, and impediments. The study also evaluated how the volume and the success of engagement have changed over time and are likely to change in the future. The survey defined engagement broadly – as direct contact between a shareowner and an issuer allowing each respondent some flexibility to define the term. Interview participants were provided anonymity to encourage candor. The full report is available at irrcinstitute.org and issgovernance.com.