Public companies engage with their investors, as well as other stakeholders, in myriad ways. Chapters 4 and 5 discuss SEC rules pertaining to required and voluntary disclosures that companies make. This chapter addresses when and how companies engage with investors outside of SEC filings.

Many public companies have in recent years increasingly focused on efforts to engage with other key stakeholders in addition to investors. The Business Roundtable’s Statement on the Purpose of a Corporation (https://opportunity.businessroundtable.org/ourcommitment/), originally published in August 2019, exemplifies the growing awareness by public companies that consideration of these other stakeholders holds great importance to their long-term success. CEOs signing the Business Roundtable’s Statement committed their companies to serve and deliver value to all stakeholders including customers, employees, suppliers, communities in which the company works, and shareholders. This chapter also addresses the growing importance placed on these engagements, and how companies are reporting on these engagements to their investors.

Shareholder Engagement in the Ordinary Course

Public companies use a combination of channels and strategies to engage with investors. SEC filings provide periodic updates on management’s view of the company’s business, industry and competitive landscape, financial results, and known trends affecting the business. Outside these filings, common forms of company-led investor engagement are generally of two types: engagement with management regarding financial results and business developments, and engagement that might include certain directors in addition to members of management on corporate governance and related topics.

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Public companies typically schedule quarterly management earnings calls to supplement their SEC filing disclosures regarding financial results and business developments. Management also discusses strategy and results in industry- focused conferences and other investor presentations. As we discuss in Chapter 5, companies must take care to provide appropriate notice of and access to such presentations when necessary to comply with Regulation FD. Management also frequently follows these broadly accessible earnings calls and investor presentations with separate, Regulation FD–compliant engagements with significant investors or investment analysts on a one-on-one basis.

Proxy Statements and Sustainability Reports

For matters outside financial results, business developments and strategy, the primary vehicle for public company disclosure has long been the annual proxy statement. As discussed in Chapter 7, an annual meeting proxy statement calls for disclosures regarding directors and nominees, corporate governance matters, and executive compensation.

Companies might also provide investor-focused disclosures on environmental, social and governance (ESG) topics in separate reports, often called sustainability reports or corporate responsibility reports. These disclosures may be formatted as stand-alone reports or interactive websites. A trend that is currently emerging and may grow to become common practice in the next several years is to include disclosure on ESG topics and metrics that are material to a company in periodic reports and proxy statements. For example, the SEC adopted rule changes in 2020 requiring disclosure of material information about a company’s human capital management in the annual report on Form 10-K and certain other filings, and has indicated that additional rule changes calling for disclosure on other ESG topics may follow.

Practical Tip: What Should a Sustainability Report Include?

A company drafting a sustainability or corporate responsibility report for the first time will need to decide what topics to address. Topics can range from the environmental impact of the company’s operations to community relationships to pay equality.

To identify topics for disclosure in an investor-facing sustainability report, a company can start by working with its internal stakeholders and then refine and expand on that analysis with information obtained from other resources. Investor engagement meetings, discussed below, are a great opportunity for a company to get feedback on potential disclosure topics. Existing internal reporting to senior management and the Board can also help guide what metrics to include in a sustainability report. A company may also want to review any previous public statements and company policies to confirm that its approach and disclosures are consistent across channels.

There are also several standard-setting bodies that provide frameworks for and guidance on sustainability reporting. Some of the prominent and widely used standards and frameworks are identified below.

  • The Global Reporting Initiative (GRI; https://globalreporting.org) is a nonprofit organization founded in 1997 that has established sustainability reporting standards. GRI’s standards focus on the economic, environmental and social impacts of a company, which may go beyond information that is material to investors.
  • The Sustainability Accounting Standards Board, now a part of the Value Reporting Foundation (SASB; https://sasb.org), is a nonprofit organization that first published its set of 77 industry standards on financially material sustainability topics and associated metrics in 2018. SASB’s approach is intended to help companies provide disclosure on ESG issues that are expected to have a financially material impact on the company.
  • The Task Force on Climate-Related Financial Disclosures (TCFD; https://fsb-tcfd.org) was established by the Financial Stability Board to develop consistent climate-related financial risk disclosures. Its recommendations, released in June 2017, provide a framework for companies preparing disclosures about measuring and responding to climate change risks.

These different standards and frameworks serve different purposes, and therefore may not be consistent. While the SASB standards and TCFD framework both seek to elucidate material disclosures that are suitable for traditional corporate reports like SEC filings, the GRI standards have a wider range and encourage companies to disclose more information, whether or not it is material to the company and its investors.

A company’s sustainability report is likely to be distinctive from any other, including reports by other companies in the same industry. But by making the most of existing knowledge and reporting within the company, along with insight from investors and existing disclosure standards, no company need start from scratch.

 

Investor Meetings on ESG Topics

Outside of disclosure through proxy statements and sustainability reports, companies may engage proactively with large shareholders on ESG topics in the months after the company’s annual meeting of shareholders. This timing allows companies to have interactive discussions with investors without having to file discussion-related matter as proxy soliciting materials. (We address proxy solicitation and related filing requirements in Chapter 7.)

This engagement also helps a company prepare for its next proxy and annual meeting season. The company learns what ESG issues are important to shareholders, and can consider making governance changes or preparing additional disclosures to address these concerns and to avoid potential public activism by shareholders. Companies that have engaged on ESG topics with their large shareholders and have responded to raised concerns are also well-positioned to seek the support of these large shareholders in case of shareholder activism in the form of shareholder proposals or proxy fights.

Engagement with Other Stakeholders

Engagement with stakeholders other than investors is not a primary focus of this Handbook, but we mention it here in light of investors’ growing interest in sustainability and ESG-related disclosures. Investors focused on a company’s long-term prospects and sustainability want to understand the ways in which the company engages with other stakeholders and addresses their concerns.

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Stakeholder groups a company might engage with or consider the viewpoints of include:

  • Customers
  • Employees
  • Suppliers, including various participants in the company’s supply chain
  • Local communities in which the company works
  • Society at large

Companies will have different approaches to engaging with these various stakeholders, and the relative importance of, and level of effort involved in, these engagements will vary. For many companies, engaging with and understanding the perspectives of different stakeholder groups is already an important part of the company’s culture and operations. For others, such engagement may be practiced in less formal or operationalized ways. In either case, there is a growing trend for public companies to inform investors – through their proxy statements or stand-alone sustainability or corporate responsibility reports – about how they engage with stakeholders and how they have considered the input received from stakeholders.

As discussed in Chapter 13, companies can be subject to securities law liability for materially misleading statements, even when those statements are not included in SEC filings. For this reason it is important to bring a critical eye to disclosures that are investor-facing, such as sustainability or corporate responsibility reports, to ensure that statements about topics like stakeholder engagements are accurate and not misleading. As investors focus more attention on ESG-related topics, companies should ensure that the disclosures are thoroughly vetted and based on repeatable and verifiable data-gathering processes, particularly where quantifiable metrics are provided.

Shareholder Activism

Investors, including activist funds, pension funds, unions and institutional shareholders, may seek to engage with companies in a more public manner than ordinary-course investor meetings discussed above. This engagement comes in various forms, ranging from shareholder proposals for consideration at an annual meeting, discussed in Chapter 7, to “vote no” campaigns urging shareholders to vote against a director or management proposal. An investor’s most potent tool is to bring a proxy contest.

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A proxy contest typically involves a challenge to existing management by a third-party acquirer or shareholder group seeking control of the company. The challenge may also be posed by a shareholder activist seeking to influence the direction of the company. Often, the challenger has obtained a significant ownership position in the company and seeks to either control the company through the election of a majority of the directors or propose a merger or tender offer for shares. (Although a detailed discussion of takeover transactions and defenses is beyond the scope of this Handbook, we summarize corporate structural defenses in Chapter 11.)

Shareholder activism has increased in recent years, and generally is targeted to affect share price, bring about governance changes or advance a social agenda. A wide variety of activists have emerged, including small and large players as well as those focused on single or multiple strategies, issues or sectors. The style and approach of activists also varies, from contentious and aggressive to constructive and cooperative.

Company size and industry no longer matter in terms of companies that are targeted by shareholder activists. In the current climate, several characteristics can make a company vulnerable to activist interest, including:

  • Excess cash/low debt (“return capital to shareholders”);
  • Multiple business lines/owned real estate (“unlock value”);
  • Management/Board composition (“entrenchment”/“lack of diversity”);
  • Undervaluation/overvaluation (“sell the company”/“sell the stock”);
  • Strategic actions/inaction (“vote against the deal”/“sell the company”); and
  • Governance structure.

Activists engage with companies in many different ways:

  • Sending public or private letters to the Board or to management;
  • Filing a Schedule 13D, which may be ordinary course or specific messaging;
  • Writing public or private white papers;
  • Enlisting or engaging other shareholders;
  • Threatening or initiating a proxy contest;
  • Submitting shareholder proposals;
  • Publicly calling for the exploration of “strategic alternatives,” an outright sale of the company, or governance or Board reforms;
  • Challenging announced transactions; and
  • Mounting “vote no” campaigns in director elections.

Practical Tip: Shareholder Engagement Best Practices

In the event your company is contacted by a shareholder activist, we suggest you consider the following in formulating your response plan.

Know Who Your Shareholders Are. Your investor relations team can proactively monitor any changes in positions of your company’s known shareholders. Investor calls and interactions with analysts are a good normal-course method for taking the pulse of the investment community. Also review and monitor Schedules 13D and 13G filings both proactively and after any engagement begins.

Response and Monitoring Depend on Activist Approach. Consider keeping your response team small to lower distraction within the company and the risk of leaks. Generally, a response team will include the CEO, CFO, general counsel, investor relations, the Board (usually the chairperson or lead independent director), financial advisors, outside counsel, and possibly an investor relations/public relations firm and proxy solicitor.

Communication Is Critical. In the event of engagement, whether proactive or reactive, establish a dialogue so that each side understands what the other wants to accomplish. Open lines of communication with the CEO and rapport with the Board are critical.

Also, consider these tips about best practices for activist engagement:

Top Things TO Do:

  • Be proactive/engage;
  • Involve the Board early;
  • Maintain tight communication – speak with one voice;
  • Define your core messages (as in a political campaign, sound bites matter);
  • Be prepared for escalation and be nimble;
  • Emphasize Board independence and good corporate governance;
  • Show a record of engagement; and
  • Be vigilant about Regulation FD compliance.

Top Things NOT to Do:

  • Be defensive or engage in personal attacks;
  • Create the perception that management dominates the company or that the Board is not fully engaged;
  • Appear closed to ideas or refuse to interact with the activist;
  • Rely on too broad a set of messages or respond to every attack from the activist shareholder;
  • Undertake fundamental strategic or financial actions that are not critical during the fight;
  • Change governance provisions or take other tactical actions that are viewed to disadvantage the activist shareholder;
  • Attempt to placate the activist shareholder by implementing fundamental changes that are inconsistent with the long-term strategic, operational or financial objectives of the company; and
  • Assume that a negative recommendation from proxy advisory firms is dispositive.