As Shareholders Sharpen Their Focus on Governance, IR Can Help
As the annual proxy season approaches, several governance issues and proposals are likely to emerge, reflecting shareholders’ increased attention to how companies’ stances on a wide range of governance issues can impact shareholder value, according to Carol Schumacher, who has held roles as both investor relations (IR) officer and corporate affairs officer, including 11 years at a Fortune 10.
Ms. Schumacher discusses emerging trends in proxy proposals and shareholders’ expectations around the governance information that management provides, and what IR can do to help companies respond, in this conversation with Sanford (Sandy) Cockrell III, U.S. national managing partner, CFO Program, Deloitte LLP.
Sandy Cockrell: What are some of the major and emerging governance issues companies are preparing to address during proxy season?
Carol Schumacher: Governance issues continue to play a larger role in the way the institutional investor community evaluates companies’ shareholder value, and expectations are increasing for the kind of governance information management provides. For example, portfolio managers (PMs) ask more questions because they evaluate governance fr om the risk management standpoint, focusing on how negative headlines can impact a company’s financial value. In fact, it’s not uncommon today for funds to ask companies how they’re using capital allocation to deliver on sustainability. That’s a sea change compared to just a few years ago, when capital allocation questions were more focused on financial and business implications. Proxy access and “Say-on-Pay” continue to be important for the companies that have yet to adopt these policies.
Additionally, shareholders will likely see more proposals on board diversity from an experience and skillset perspective, as well as the board’s men-women ratio. For example, investors want to know who on the board has the skillset to understand cybersecurity strategy or risk management. This year, there will also likely be more proxies with statements addressing board tenure, term limits, refreshment and succession planning, reflecting growing concerns that longer board tenures can imply a lack of independence from management.
Another trend is for investment funds to join forces on governance issues, especially for proposals on environmental and sustainability issues. For example, many investors are asking about how companies optimize their resources, like water usage, energy consumption, recycling and other policies to protect the environment. They are also asking that companies report more on sustainability issues, including their supply chains and those of their suppliers. “Human capital management”—today’s buzzword in governance for how companies treat workers—is another important topic among governance professionals. In addition, companies can expect proposals asking about their political contributions in terms of what are the issues that they are lobbying for or against and wh ere the lobbying funds are being spent.
Sandy Cockrell: How can IR teams help their organizations address investors’ interest in how governance impacts shareholder value?
Carol Schumacher: It’s critical that the IR function work collaboratively, both internally and externally. Leading-edge IR teams are working in close partnership with finance, legal, compliance, risk and other functions, to develop proxy statements and to align to the investor community’s focus on how governance, business and financial issues together impact shareholder value. IR should be working closely with those functions 365 days a year, so that that there are no surprises from shareholder proposals when companies start preparing for proxy season. IR can be a vital source of intelligence, for instance, relaying information gathered during road shows and conference calls on what governance issues investors are focusing on.
It’s also critical that investor relations officers (IROs) talk on a regular basis to portfolio managers about the priority governance issues in their funds, and with those heads of governance who are advising the portfolio managers on how to vote. IR needs to have that relationship long before there’s an issue in the proxy and the votes appear not to be going management’s way. It wasn’t too long ago that the standard practice was to deal with proxy proposal letters almost adversarially, with no communication with the investor who sent the proposal letter. But now companies are realizing that institutional investors, for the most part, are as interested in long-term shareholder value as management is. So if an investment fund sends a proposal concerning a particular environmental issue, it’s generally because it believes the issue could impact long-term shareholder value. By engaging with investors on their proxy proposals long before the proxy statement goes out, IR can help educate them on what management is doing to address the issue in question, or possibly negotiate an agreement with investors so that the proposal doesn’t end up in the proxy.
Sandy Cockrell: What capabilities are essential for IR to be an effective partner on governance matters?
Carol Schumacher: First, the IR function has to establish its credibility inside the company to collaborate on responding to proxy proposals and other governance issues. As an IR leader, I learned the value of making sure that I and my team educated ourselves on governance subjects and engaged with those responsible for governance and compliance in the company.
IROs fielding governance questions or helping on a proxy proposal on an environmental or sustainability topic, for example, should have a working knowledge of the issues and be able to pull in appropriate subject matter experts to communicate the appropriate points to investors. An IRO at a company that manufactures or sells apparel sourced overseas likely is not an expert on child labor issues, but can know who to partner with inside the company to evaluate messaging and make sure that subject matter expert helps communicate with a fund portfolio manager or head of governance on the questions being asked. In my former role as IRO, the relationships I established within my company meant that we could partner with the experts to address questions with authority and in a timely manner. We would also build on our subject expertise by tracking history and progress on an issue.
IR leaders today have to be top-notch communicators, not only in telling the financial story, but beyond that. If an environmental disaster occurs, that’s going to affect the company, and IR has to be ready to communicate what the company’s doing to fix it. It is important to discuss the financial implications and risks that are critical for shareholders to understand if there is an issue weighing on the company’s reputation.
Sandy Cockrell: What should CFOs expect from IR to help keep them on top of potential governance issues?
Carol Schumacher: CFOs should make sure IR is collaborating with legal, compliance and other key departments in responding to governance issues that could impact shareholder value. CFOs should also expect IR to engage on governance across the buy-side spectrum, meaning portfolio managers, analysts and governance professionals, to help understand and address governance concerns before they become proxy proposals. It’s IR’s job to make the CFO, the CEO and, to a certain extent, the board aware of investors’ governance concerns so that leadership isn’t surprised when they hear about a proxy proposal or when they get a question on environmental or sustainability policy at a road show.
Finally, it’s important that IR work closely not only with finance, legal and compliance on developing governance proxies, but also with corporate affairs and PR to ensure consistent messaging on governance issues. I’ve learned from my experience heading IR and corporate affairs how strategically important it is to a company that IR, PR and corporate affairs be joined at the hip in developing and delivering the messaging on company governance, just as they should be in crisis management situations and earnings announcements.
Editor’s note: This article is part of an ongoing series of interviews with CEOs, CFOs and other executives. Ms. Schumacher’s participation in this article is solely for educational purposes based on her knowledge of the subject, and the views expressed by her are solely her own.