Once, chairmen regarded an annual letter offering their availability for meetings as sufficient to discharge their engagement obligations with major investors. More is now expected—but what is best practice and what is the role of non-executives in the company’s interaction with the stock market?
The Investor Relations (IR) Society believes that there should be a regular and consistent process of engagement, over time, between a company and its key investors, in order to establish, develop and maintain relationships. A company gets the investors it deserves; building trust matters in achieving a full and fair valuation for a company’s stock.
The 2020 Investor Stewardship Working Party commissioned guidance on “Enhancing Stewardship Dialogue”, prepared by the ICSA with the involvement of the IR Society, institutional investors and companies. This practical advice facilitates good engagement practices and so supports long-term investment. Its “illustrative engagement strategy” suggests non-executive involvement as follows:
- The chairman and/or senior independent director (SID) should be available to meet with major shareholders once a year, as required.
- The chairman and non-executives should selectively attend company-hosted results presentations—not always and not all together. They should also attend a sample of the standard annual IR programme one-to-one meetings, held between the company and its investing institutions.
- The chairman, SID and relevant non-executives should have informal round table discussions with the investment directors, portfolio managers and corporate governance heads from their leading shareholders, to discuss significant live issues. In addition to these group meetings, they should have one-on-one discussions if specific issues arise.
- There should be an annual meeting between a company and its investors to discuss the company’s strategy and long-term performance, and the governance arrangements in place to sustain that performance. Company attendees should include the chairman, SID, chairs of board committees and other non-executives if they wish.
In practice, we see our members increasingly incorporating their chairman, SID and non-executives into their overall IR programme. The level of engagement between boards and investors has increased and the quality has improved: more “purposeful dialogue” and less box-ticking; greater focus on topics other than remuneration; and somewhat better integration of ESG into discussion of long-term performance.
There remains some frustration concerning a lack of coordination: between corporate governance heads and fund managers, or between IR and company secretarial departments. The IR Society is urging improvements in this area.
However, anecdotal sampling of our members suggests the engagement strategy shown above is rarely followed in full. All send an annual letter to major investors, offering the chairman and SID’s time as required. Most IR teams arrange a programme of group and one-on-one meetings, deliberately separate from the AGM and results schedule. These are attended by fund managers and corporate governance contacts, and by the chair, SID and perhaps board committee chairs.
They are designed to build and strengthen relationships and allow a range of topics to be discussed informally. Specific engagement then takes place as and when required, for example when consultation is taking place on remuneration proposals.
It is unusual for non-executives, other than occasionally the chairman or SID, to attend results presentations, perhaps because the audience is dominated by sell-side analysts. And although some large companies are arranging periodic group meetings of the type suggested in the guidance, these remain the exception.
This should not be a concern as long as each company has devised an engagement strategy that is appropriate to its circumstances and the requirements of its shareholders, and which is subject to regular review. After all, institutional investors have differing preferences and capabilities to respond to requests, as has been made clear at recent IR Society events.
More than once we have heard that, due to time constraints, corporate governance contact is limited to companies in which the institution has more than a 1% stake. One large investor sees limited benefit in attending major set-piece events, preferring to meet board and executive management representatives at their offices.
This same investor also encourages individual non-executives to join executive management occasionally at regular investor meetings, to hear investor views and concerns directly.
Another investor, smaller on many companies’ registers, values the chance to meet non-executives at group events. In general, companies are encouraged to put forward the appropriate representative (whether that is the chairman, SID, board committee chair or other non-executive) and to ensure that contact is coordinated through their investor relations team.
In summary, although engagement has increased, non-executives who are not board committee chairs are likely to have only limited direct contact with the company’s shareholders. Irrespective of that, they should reassure themselves that the company’s engagement strategy is appropriate and that a satisfactory two-way dialogue is taking place. After all, relationships should be built long before challenging issues need to be discussed.
Sue Scholes is a board director and former chair of the Investor Relations Society.