With investors demanding better communication from boards, the proxy statement remains the most influential and effective tool for shareholder engagement. At one end of the spectrum, investors will spend a mere five minutes skimming the proxy, while at the other end, shareholders or proxy advisors will scrutinize each section with a fine-tooth comb.
Boards must communicate effectively with both kinds of investors—a real challenge in today’s world of informational clutter and regulated disclosure. And yet, we’ve seen several boards respond with effective solutions, as evidenced by Donnelley Financial’s latest Guide to Effective Proxies (i.e., an extensive catalog of best-in-class proxies from the 2016 proxy season).
Ron Schneider of Donnelley Financial Solutions recently visited our show to discuss proxy trends and make recommendations to boards on key areas of improvement. Below, we outline his three recommendations to boards for the 2017 proxy season.
1. Consider a cover letter with two distinct points of view.
What was once a perfunctory invitation to the meeting is no longer. Cover letters are increasingly being used to highlight business accomplishments, recent challenges, and key voting issues. However, these newly substantive cover letters are also being used to communicate two distinct, but important, perspectives—that of management and the board.
Some companies have gone so far as to draft two separate cover letters. Other companies have outlined their cover letter in two distinct sections, including signatures from both the CEO and chairman or lead independent director.
The board’s letter frequently focuses on the board’s oversight of risk, independence, investor engagement, board and CEO evaluation, and succession planning.
If board members are involved in the company’s shareholder engagement efforts, Schneider added, he frequently sees the board using the cover letter to talk about their efforts and the benefits of engagement.
The Takeaway: Boards are finding a distinct voice in the cover letter of their proxy statements—largely an answer to investor demands for engagement. How can your board better leverage the cover letter as a tool to summarize your mission and recap your progress?
2. Streamline descriptions of board skills, diversity, and tenure. Focus on telling the story.
Board member bios are shrinking. Paragraphs about skills and diversity are being replaced by bullets. These changes, however, are not just in the interest of brevity; they help tell the board’s story.
Diversity and tenure have been under particular shareholder scrutiny lately. While a traditional proxy might disclose the average age of its board members, more progressive companies are taking the time to demonstrate the spread.
“We’re seeing more visual depictions,” said Schneider. “When you break it down, you may see that we have two directors in their 40s, two in their 50s, three in their 60s, etc. It provides a generational perspective.”
The same strategy can be applied to director tenure, added Schneider. Breaking it down allows investors to visualize the spread and may provide a better depiction of board diversity.
The Takeaway: Identify areas where the board may be challenged by shareholders (i.e., tenure, diversity, industry specializations). How can the board break down the numbers to better tell its story?
3. Familiarize your board with competitor proxy statements. Don’t fall behind.
Thanks to increasing pressure from investors, complacency on the board can no longer be afforded. Boards should be familiar with the proxy statements of their peer group. How effectively is our competitor communicating their compensation plan? What can we learn from their approach to improve our own?
Increasingly, we’re seeing mandates from the directors themselves, who are pushing management to adopt a more innovative proxy format, said Schneider. These directors may be CEOs, or they may serve on other boards that are using proxy statements more effectively.
The Takeaway: As more responsibility is placed on board members to engage, they must recognize the important role of the proxy statement. What due diligence should be undertaken by each individual board member? By the board as a whole? Ultimately, boards must ensure that their primary tool for engagement (i.e., the proxy statement) is serving its intended purpose—even if that requires a restructuring of the status quo.