With boards of directors under a microscope in today’s world, they must show how their work contributes to the success of the companies they oversee, and build trust with shareholders. For many of these shareholders, a company’s proxy statement is their only chance to look into the key aspects of the boardroom. So the goal of the proxy statement is two-fold: be informative and be credible.
In working on proxy statements for 1,500 companies annually, we’re seeing a number of trends that foster a sense of accountability between the board and shareholders. At the top of the list are (1) providing business context, (2) a description of board skills and diversity and (3) incorporating more storytelling.
Provide Business Context
In proxy statements that stand out, more space is devoted to voluntary disclosure (i.e. not mandated by the Securities and Exchange Commission) that creates a narrative and business context for the institutional proxy voter. The goal is to educate these voters, who at the larger institutional investors are governance generalists and not portfolio managers or equity analysts, and therefore are not likely to know much about your company. Given most companies are on calendar fiscal years, this means that proxy voters work in a particularly compressed time frame during the Spring – from the time a company files its proxy until its annual shareholder meeting.
These voters carry the responsibility of voting on hundreds or even thousands of portfolio company proxies in the best interests of their investors. We’re advocating that proxies go beyond SEC requirements to meet investor informational needs. Each year we see changes by many clients who are taking their proxy statement to the next level, whether through adding additional business context, company branding, highlighting key points visually to make them more memorable, and enhanced navigation to make the document more digestible. Given the time crunch and heavy work load, these voters do their best to make informed decisions; however, in the absence of clear and compelling information provided by the company, they may be more likely to vote as recommended by a proxy advisory firm. This elevates the proxy statement to the primary opportunity to educate this audience about your business, create context between business strategy and outcomes and present your case for any proposed initiatives requiring shareholder approval.
One effective way to provide context is with a letter from the CEO, board chair or independent lead director. In addition to inviting shareholders to the annual meeting or to vote by proxy, the letter can also be used to bring attention to particular business accomplishments, recent challenges a company is facing or highlight key proxy voting issues. This is a very company-specific consideration, not a “one size fits all” that all companies must adopt. We engage our clients in discussions to consider the merits of incorporating this type of letter into their proxies as part of effectively telling their unique stories. For instance, Apache Corporation and Aqua America, Inc. are examples of companies that used such letters in 2017 to provide greater business context to fully inform voters.
Highlight Board Diversity
Board composition may require you to think through different ways to measure diversity. Don’t limit yourself to gender and ethnicity diversity. Age and director tenure are also important considerations because today’s boards need a continual refreshing of skills. New directors should bring the critical skills that help companies manage rapid growth, changing business models, new technologies and emerging threats, such as cybersecurity.
You can emphasize aspects of board diversity and skills through diversity graphics, and various types of skills matrices (both traditional, check-the-box matrices, as well as versions that highlight board skills without linking them to particular directors.)
While companies are required to disclose the age of each board nominee, some progressive companies are also highlighting age diversity, by visually demonstrating the spread. For many companies, “average” or “median” director age or tenure is, well, “average” or even on the old/long side. But when you parse it further, you often see that there is a significant “age” or “tenure” diversity story that the “averages” don’t tell. For example, average age may be 64, but this includes two directors in their 40’s, two in their 50’s, three in their 60’s, 1 over 70, and this “generational diversity” is more informative. We support clients in considering this by often proactively showing them what such graphical story-telling could look like for their particular company and current board demographics.
For example, McKesson’s proxy statement from 2017 is a good example of a creative way to visually tell a company’s board diversity story. Rather than telling this story only through words, the company used pie charts and images to show that its nominees standing for board reelection have diverse backgrounds, skills and experiences.
Incorporate More Storytelling
Investors want companies to communicate and explain rather than simply disclose. This represents a significant opportunity for many companies to improve the clarity and effectiveness of their proxy statements. Since the investor relations team is responsible for a company’s ongoing investor messaging and direct communication with shareholders, they are best positioned to help integrate this story into the proxy and are playing a bigger role on the proxy development team.
A critical question your proxy should answer is: How do proposed initiatives support the company’s growth and value creation strategy? “How pay supports strategy” is a top-level question investors have, that frequently is not directly answered. The answer to this question should align with the investor story you tell analysts and portfolio managers in earnings calls and investor meetings. In short, you should repurpose your investor relations messaging for your proxy statement. Not doing so not only risks lack of clarity, but also could permit sending mixed or conflicting messages.
Displaying data in a visual format allows the reader to consume information quickly and with more clarity. If you have a traditional 14A that’s black and white and mostly text, you may want to create something more visual that tells your best board story or your best pay story. Graphs, tables, timelines, checklists, shading and call-outs can punctuate dense text, invite the eye, and quickly and impactfully make key points.
Positive Peer Pressure
Thanks to increasing pressure from investors, proxy statement status quo is no longer acceptable. Boards must be familiar with the proxy statements of their peer group as well as of their own company, since many of your investors also own your peers. How effectively is your competitor communicating their compensation plan? What can you learn from their approach to improve your proxy statement? Increasingly, we’re seeing mandates from the directors themselves, who are pushing management to adopt a more innovative proxy format.
While shareholder engagement continues to evolve, the proxy statement is still the dominant tool for investor communication of corporate governance and compensation practices. As the SEC “layers on” additional disclosure requirements that contribute to greater proxy length and complexity, the new rules should not keep companies from (1) communicating clearly, (2) making sure the document flows and information is accessible where investors expect to see it and (3) facilitating navigation through detailed tables of contents, page headers and footers and a clear and consistent hierarchy
Ron Schneider
of section headings and subheadings. The need for boards to use tools that effectively communicate their message is more important than ever. With many companies, including your peers, constantly innovating and enhancing the clarity of their proxy and other communications, companies can’t “stand still” since over time you will decline relative to others who are upping their game.
Ron Schneider is director of Corporate Governance Services for Donnelley Financial Solutions.
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