In Part 1 of this blog series, we discussed the newfound prominence of today’s proxy statement, which has become a valuable marketing tool for both boards and management. Many companies are still trying to discern the proper approach to proxy composition, the explanation of their strategy, the use of visual elements, etc.
In the past, the design and organization of proxy statements was always an afterthought. Yet, this kind of thinking can be detrimental to today’s boards—and a missed opportunity, at best. With scrutiny of board operations at an all-time high, and with proxy statements growing longer and more complex, boards must not pass up the rare opportunity to tell their story.
On a recent episode, we sat down with Donnelley Financial Solutions’ Ron Schneider to discuss trends in proxy design, as well as his recommended best practices for boards. Following the 2015 proxy season, Donnelley Financial Solutions undertook a massive content analysis of proxy statements and compiled their findings into a comprehensive guide for board members (“Guide to Effective Proxies”). Below, we’ve summarized several of the best practices, including examples of companies that are raising the bar and leveraging proxy statements effectively for shareholder engagement.
The DOs and DON’Ts of Proxy Statement Design
DO: Visualize the information.
Apart from the corporate governance world, infographics and informational design has become a field unto itself. Displaying data in a visual format allows the reader to consume information quickly and with more clarity.
“The old way of hiding information was in the footnotes,” said Schneider. “The new way is to leave it in the text. Therefore, proxies are becoming more visual as well.”
At the 4:50 minute mark, Schneider offers several examples of how companies are ‘thinking visually.’ For instance, a board process may be best explained with a timeline. A list of practices can be clearly conveyed in a checklist. Diversity of board skills can be demonstrated with a matrix. How is the board using shading, call-out boxes, and graphs?
“Another area where we’re seeing much creativity is board diversity,” said Schneider. “We’re seeing graphical illustrations of diversity in age, gender, tenure—showing refreshment, skills, and qualifications.”
Directors must understand that the purpose of visualizing proxy information is not to add bells and whistles. Rather, the purpose is to communicate the most important information to the shareholders so that the company and board’s narrative, positioning, and qualifications are conveyed without question. Boards that refuse to acknowledge the shareholder engagement function of today’s proxies may find themselves haunted by the consequences of miscommunication.
DON’T: Overlook navigational elements.
As proxy statements grow longer and longer, institutional investors are using proxies as a reference document, rather than a traditional reading document, Schneider explains.
“Depending on what topic they may be interested in, they want to locate that information quickly,” he says. “Therefore, navigation becomes very important.”
The table of contents has become the crux of today’s proxy statement; yet, other navigational elements such as headers and subheads have become equally important. How do subheads guide the reader’s eye down the page?
In the example above, ACE maintains a consistent page structure from one agenda item to the next. The reader can easily scan the board’s explanation, voting recommendation, etc. Shareholders should have the option to engage with proxy information on their own terms.
DO: Humanize the report.
Whether we’re talking about a consumer making a purchase decision or a shareholder making an investment decision, it’s human nature to select the brand or company we trust the most. Likewise, the proxy statement must present both the board and the company as genuine, approachable, and human.
Leverage corporate branding to highlight the company’s mission. Include (quality) photos of the directors so that shareholders can put a face with a name. Use FAQs and call-out boxes to answer questions or draw insights in a conversational tone. These age-old marketing principles apply to the modern-day practice of proxy design and shareholder engagement.
DO: Use Q&A to address key concerns.
Today’s boards must expand their thinking of FAQs beyond administrative topics (e.g., What is a proxy? How do I vote?). A question-and-answer format is an excellent opportunity to address key concerns that may have arisen through prior engagement with shareholders.
In their Guide to Effective Proxies, Donnelley Financial Solutions demonstrates that many companies are using FAQs to address more substantive questions: “Why follow management’s voting recommendations?” Boards should consider how they can leverage Q&As to explain their decision-making process—whether related to compensation, risk oversight, or board diversity—in a clear, digestible format.
DON’T: Forget to highlight the “anti-philosophy.”
As we discussed in a recent blog, it’s nearly as important these days to highlight what the board WILL NOT do, as it is to highlight their core strategy. Jim Curtiss, who has served as Cameco’s compensation chair for over a decade, explains that Cameco specifically outlines what they do not support so that there is no question among shareholders:
“There are red flags that we have all come to learn about over the years,” said Curtiss. “Things [like repricing options] that, as we explain in our CD&A at Cameco, we just don’t do.”
Boards are using a checklist format to highlight the DOs and DON’Ts that characterize their philosophy. Among the DON’Ts, boards are explicitly stating things like No hedging of stock, No new tax “gross ups” for executive officers, No new participants in the SERP, etc. Effective shareholder engagement rests on communication, and oftentimes an explicit list of DOs and DON’Ts can eliminate any guesswork.