In addition to traditional Investor Relations roadshows focused on financial performance, companies and boards are now expected to conduct governance and sustainability roadshows that reach out to institutional stewardship teams as well as portfolio managers.
For issuers, these engagements require the commitment of significant resources internally, including valuable board time. For investors, the expansion of stewardship activities means that even for those who increased the internal resources (see our earlier piece on Stewardship Principles), the escalating demand on capacity is forcing them to be more selective and raise expectations on the content and quality of engagements.
Based on Morrow Sodali’s experience assisting companies with planning and organization of governance and ESG roadshows, we note factors that are key to successful engagements.
Starting with coherent strategic thinking internally, the company should define and communicate the objective of the engagement. It could be to showcase a new strategic direction, or developments in the business that are related to material ESG themes, or it could be part of an ongoing dialogue with investors about relevant issues. Historically, most roadshows were scheduled in anticipation of a forthcoming shareholders meeting, but we find that many shareholders are growing reluctant to take meetings – given that their voting policies are published in detail – purely on this basis, especially during the annual meeting season.
Mapping of shareholders
When the primary purpose of a roadshow relates to a shareholder meeting, whether to improve voting quorum or to canvass support, it makes sense to prioritize outreach by holdings. Companies should always consider investors’ voting policies and should follow up on issues raised during previous engagements. However, when the engagement agenda is focused on ESG developments, companies may wish to cast the net wider, and target those investors that are long-term oriented and known to be focused on these issues. The guiding principle here should be to speak with existing shareholders, but also reach out to targeted shareholders the company wishes to have (or wishes to own more stock).
Deciding who to speak with - location, team members
Many institutional investors are making efforts to link internally their investment and stewardship teams. Companies should reach out to both investment and stewardship teams, as appropriate, but it is up to the investor to decide who is best to lead a specific engagement. We recommend that companies do their homework and ensure they are including all the appropriate contacts and positioning the engagement campaign so as to make it easier for the investors to decide who should be involved.
A key question for companies is whether members of the board of directors should be involved and if so, which directors are needed to address relevant issues. In addition, should members of management be included or not? For example, on compensation issues, investors may want to talk primarily to board compensation committee members. In other cases, HR should be included. The demands on investor resources mean that increasingly they view it as important to have direct dialogue with directors (see our Institutional Investor Survey 2019 more on why and how to do this) as well as relevant members of the management team (e.g. HR representatives on issues of human capital management).
On a practical note, Morrow Sodali often come across companies who apply a strong home bias in targeting their investors. Our experience indicates that cross-border ownership is increasingly common even in controlled companies. In those cases, we recommend roadshow itineraries should include markets where investors are located (e.g. London, Paris, Netherlands), regardless of where the company is domiciled.
Evolving stewardship responsibilities and regulatory requirements mean that the information investors are publishing about their voting and stewardship policies is more extensive than ever. We recommend that companies conduct meticulous preparation in advance of meetings, and tailor the meeting agenda and materials to meet investors’ preferences. Because investors’ time and resources are limited, engagements should do more than rehash publicly stated positions. The goal is to conduct an informed and informative dialogue.
Anecdotal evidence shows that, at times, preparation is needed just to secure some meetings. At Morrow Sodali, we are aware that some of the large investors have updated their access processes to ensure that requests for engagement pass a threshold of demonstrating preparedness as a condition to them being considered.
This is perhaps stating the obvious but thinking about the next meeting and the next engagement means that companies have to maintain credibility and follow up as agreed. For example, when a consultation process culminates in new proposals, it is important to go back to the relevant investors and communicate the rationale for the chosen course of action – i.e. even, and perhaps especially, if the company felt it was not able to fully adopt the preference of the particular investor(s).
Why this is important?
Executing an effective investor engagement draws on precious corporate resources including valuable management and board time. It is important therefore that companies fully consider the benefits. Most immediately, this includes strengthening of the relationships with long-term minded owners – those shareholders most companies would wish to have more of. Regular face-to-face meetings with investors can be a critical part of this. Additionally, with the current level of activism, we find that for some clients, especially in Europe, the ability to draw on support from long-term shareholders has been a key component of activism defense. More fundamentally, there are several pieces of academic research suggesting that engagement enhances value, presumably by enhancing communication and helping to close any possible disconnects between valuations and prices.