Preparing for Proxy Season 2011 (Part 2 of 3)

1. Know your shareholder base. Determine whether a majority of your shares are held by institutional investors or retail shareholders. Determine whether your larger institutional holders develop their own proxy voting guidelines or whether they follow the recommendations of a proxy advisory firm. Finally, determine how often they engage with companies and on what types of voting issues. Without a working knowledge of the voting trends and policies of your shareholder base, it is impossible to predict whether a proposal will garner majority support.

2. Engage shareholders early. One of the more common misconceptions among companies is that their day-to-day institutional contacts (including analysts and portfolio managers) have significant input in voting proxies. While that may be the case in some instances, particularly in the case of mergers and acquisitions and proxy contests, many institutions have established proxy voting or governance departments. If a company does not have an existing relationship with a proxy decision maker at an institution, it is vital to develop those relationships. Furthermore, to the extent you are aware of a problematic issue on the ballot, it is best to engage with institutions to gauge their stance on the matter. Early engagement can save a company time and energy required to fix the problem during the course of a solicitation. Finally, if your company does have a meaningful percentage of its common stock held by retail investors, make an  effort to reach these investors long before you need their support – whether it be dedicated content for retail investors on the IR portion of your website, a quarterly update that is mailed with dividend checks (if applicable), social media tools, or the distribution of key trade media or business media coverage, among other things.

3. Build relationships with proxy advisory firms. Establishing productive and ongoing relationships with the key proxy advisory firms, such as Proxy Governance, Glass Lewis and RiskMetrics, will likely serve the company well over the long term. Companies should also consider scheduling a meeting with the RiskMetrics analyst who will be making the recommendation on the action items at the annual meeting. Bear in mind, however, that these meetings are granted at the analyst’s discretion and there is no obligation – implied or otherwise – to meet with management to discuss the various items on its proxy ballot. Furthermore, during the busy proxy season, these meetings usually occur only by phone to allow the analyst to facilitate as many meetings as possible. Although there is no guarantee that a discussion will result in a favorable recommendation, it will at least provide the company with the ability to refine and sharpen any governance message. RiskMetrics typically releases its voting recommendation reports about two weeks before the company’s annual meeting. 

4. Engage a proxy solicitor. These solicitation firms can greatly assist your efforts in the proxy solicitation process. A proxy solicitor will: (i) use its market intelligence and research to help companies predict possible vote outcomes, as well as help to develop a concerted and proactive shareholder outreach strategy designed to invest time wisely by focusing on those shareholders legitimately “on the fence” regarding particular proxy items; (ii) help identify a decision maker within an institution if the company does not already have a relationship with that individual; (iii) analyze whether a retail shareholder campaign is needed in the event of a close vote and, if so, help to shape the components of that campaign; and (iv) assist companies and their outside advisers in understanding the voting policies of the various proxy advisory firms.

5. Keep the entire team updated. It is imperative to keep management and the board apprised of key developments and findings. Both groups must have a clear understanding of where the company’s institutional holders stand on current and looming issues. Likewise, they should be alerted to any major changes in the shareholder base and the underlying factors driving those shifts, as well as any inquiries received or expressions of interest (e.g., attending conference calls, requesting one-on-one meetings with management at industry conferences, etc.) from known activist funds. Similarly, they should also be briefed regularly – as part of the investor relations update – on important regulatory changes and the impact of these changes on the organization, especially those that may put the company at risk.  

6. Expect more shareholder activism. With valuations still well below expectations for most publicly traded companies, coupled with the recovering financial condition of many hedge funds and activist investors, it would be prudent to expect these recent and expected governance changes will increase the likelihood of your company finding itself “in the crosshairs” of an activist campaign. Among other things, the enhanced disclosure requirements around board structure, board member background and qualifications, and executive compensation will be under close scrutiny by activist shareholders looking for vulnerabilities to exploit and leverage. Likewise, a company’s sustainable practices and best efforts to mitigate its impact on the environment could also come under greater examination in the United States as investment funds with particular social agendas become more active and vocal during the annual proxy season. 

7. Be prepared. Finally, long before a proxy fight arises, companies and their directors should have a well-thought-out and documented rationale for their strategic decisions and governance policies and practices – from board composition to board structure, from executive compensation packages to risk management oversight protocols. By doing this work in advance of any potential conflict, a company (and its external advisers) can more quickly and accurately respond should a challenge arise.   

Be curious to know what pre-planning you are doing for the upcoming proxy season, which is closer than you think.