From Shareholder Engagement to Integrated GovernanceMorrow Sodali
Shareholder engagement is one of the most significant recent developments in the area of corporate governance. It covers the intense and regular dialogue taking place between issuers and their investors on topics related to the way a company is managed (composition and role of the board, balance of power, executive compensation, etc.), more particularly in the context of the preparation of the shareholders’ annual general meeting.
Fostered by the European regulation (directive on shareholders' rights), this dialogue is part of the business logic of large institutional investors whose index strategy or the importance of investment stakes do not allow them to sell their shares easily. Favoring "voice over exit," their goal is to encourage issuers to put in place effective governance mechanisms to protect the long-term interests of shareholders.
The intensity and content of this dialogue are still heterogeneous, but a positive dynamic is underway. Investors are beefing up (or create) specialized governance teams capable of developing independent views (which could diverge from recommendations provided by proxy advisors) on how companies are governed. The best in class companies contribute to the training and the experience of the investment professionals by the quality of the dialogue which go beyond a reformulation of the characteristics (often stereotyped) described in the official documents.
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