The proxy statement was once a mere formality of the corporate governance world. With a primary focus on compliance, the proxy statement of decades past was typically 20-25 pages long containing little more than biographical and voting information.
Fast-forward to today, and we’ve seen a great evolution in proxy statement composition and design—but also function. “Proxy statements have shifted from serving as a compliance document to a way that keeps investors engaged,” said Irving Gomez (Managing Counsel at Intel Corp.) in a recent Ethisphere article.
Dodd-Frank regulations like Say on Pay (bolstered by an uptick in shareholder activism) have funneled attention to the proxy statement, which increasingly functions as a communication and positioning tool for boards and management. Yet, the rapid prominence of the proxy statement has left directors a little spooked. How much information is too much? How do we explain our decision-making process? What are the consequences of poor disclosure?
We recently sat down with Donnelley Financial Solutions’ Ron Schneider to discuss current trends in proxy statement composition and design. He pinpointed key factors contributing to the evolution of proxy statements and their role in shareholder engagement.
Shareholders are using the proxy statement to make investment decisions.
According to a 2015 study conducted by Donnelley Financial Solutions, Equilar, and Stanford’s Rock Center for Corporate Governance, 59 percent of institutional investors use proxy information for investment decisions.
In making investment decisions, [ investors ] rely most heavily on disclosure relating to performance metrics used in compensation plans, pay-for performance alignment, the corporate governance profile of the firm (including shareholder rights and anti-takeover measures), and risk oversight.
The CD&A executive summary is probably the first destination for most investors, said Schneider, emphasizing the importance of pulling back the curtain on board strategy.
“Companies should consider going beyond the minimum, traditional—sometimes boilerplate—information to provide more insight into the board, its quality, and its operations,” he added.
The proxy statement may not be the only method for communicating the board’s thought process on important issues, but for many investors, it remains the primary window into the boardroom.
Proxy statements are becoming a more influential branding and positioning tool.
In a recent article, Ethisphere described the distinct marketing and shareholder engagement function that today’s proxy statements are assuming. Superseding the annual report in both importance and design emphasis, the proxy statement is a way for the board to “set their narrative and call-to-action” for investors to vote in their favor. In the case of a proxy battle, it’s a positioning tool that can prove rather valuable.
“The proxy statement should be treated like a story with a short table of contents, followed by a brief summary of highlights that contain keywords, which easily catches the reader’s eyes,” instructed Gomez.
When one considers the clutter of today’s informational environment (i.e., social media, email communication, busy schedules, etc.), the unique opportunity of the proxy statement becomes clear. Boards have access to a captive audience. With the proxy statement, investors are tuning into what boards have to say, and they expect to gain a clear understanding of the board’s position, strategy, and talents.
In Part 2 of this blog series, we explore specific design elements related to the proxy statement’s role in shareholder engagement.