Board-Shareholder Engagement Focusing on Strategy

Shareholder activism is rising in the United States, and NACD analysis of survey data shows that directors are responding with growing shareholder communications.

As the 2024 proxy season approaches, headlines are chronicling renewed efforts by Trian’s Nelson Pelz to gain a seat on the Disney board, as well as the current campaign by a coalition of labor groups to gain three seats on the Starbucks board. Smaller companies are also the targets of activism, as shown by the recent examples of Clear Channel Outdoor, Forward Air, and Beyond (formerly Overstock).

According to the Bloomberg Global Activism League Tables, shareholder activists waged 823 campaigns seeking changes in US companies—large and small—last year, up from 665 in 2022 and 596 in 2021. Looking ahead, if such activists start buying the voting rights of other shareholders as enabled by the newly formed Shareholder Vote Exchange out of California, their power could grow.

In addition to these campaigns for their seats, boards are also experiencing an increase in the number of shareholder proxy resolutions on a variety of issues. The 250 largest companies saw 55 percent growth in shareholder resolutions over the past two years—from 272 in 2021 to 363 in 2022 to 417 in 2023, according to proxymonitor.org (using advanced search). Campaigns against smaller companies have grown 38 percent over the past two years.

DIRECTORS ARE EXPANDING THE NARRATIVE

Are directors ready to face activist owners in 2024? Responses to the NACD 2024 Board Trends and Priorities Survey (the Trends survey) indicate that the answer is yes. The survey revealed recent, active, high-level communications between board leaders and their key investors.

Two-thirds (65.5%) of respondents to the Trends survey said that in the past two years they had provided more information about board composition, board diversity, and board skills and experiences in their company’s proxy statement. In short, they are telling their “story” in more vivid ways in their published communications to shareholders.

Results were consistent across company sizes, but larger companies (with annual revenues of $1 billion or more) are likely to make more environmentally related disclosures. Smaller companies (with annual revenues of less than $1 billion) were more focused on disclosures in the compensation discussion and analysis (CD&A) section of the proxy.

Other improvements in proxy statements included more information about board oversight of environmental, social, and governance (ESG) issues; better graphic format; and expanded information in the CD&A section of the proxy statement. (See Illustration 1.)

Illustration 1
Key Changes in Board-Investor Communications over Past Two Years
(Respondents Could Select All That Apply)

Source: 2024 NACD Board Trends and Priorities Survey, n=230

DIRECTOR-SHAREHOLDER MEETINGS

Beyond honing their written communications to shareholders, boards are joining and actively participating in meetings with shareholders. Most boards (59.7%) are meeting face-to-face with their largest shareholders to discuss a variety of high-level issues—most typically (in 67.9% of cases) with the board chair present. (See illustration 2.)

Illustration 2
Board Participation in Institutional Investor Meetings in the Past 12 Months

Source: 2024 NACD Board Trends and Priorities Survey, n=263

Of those that selected Board Participation, Roles of Participants
(Respondents Could Select All That Apply)

Source: 2024 NACD Board Trends and Priorities Survey, n=156

Others on the company side of the table include the lead director, committee chairs, the general counsel, and the investor relations officer. The general counsel was only present at 13.5 percent of the face-to-face meetings between directors and key owners recalled in the survey—a surprisingly low figure given the existence of Regulation Fair Disclosure, a regulation (passed in 2000) that sets strict legal boundaries around such discussions. Under this regulation, companies may not make selective disclosures of material, nonpublic information. If a company does happen to release such information in a private meeting with some shareholders, then it must promptly make public disclosure of that information.

The presence of investor relations at these meetings may signal a trend toward giving more respect to this function. More than one in five respondents (21%) to the 2023 NACD Public Company Board Practices and Oversight Survey indicated that they had their new directors meet with investor relations staff as part of their onboarding program. From meetings with directors around the country, NACD also has anecdotal evidence of growing inclusion of stock analysts in such meetings—both buy side invited by the investors and sell side invited by the company.

HOT TOPICS FOR INVESTORS

The NACD Trends survey showed that 11.6 percent of boards met regularly with investors. The remainder of respondents were equally divided between directors who meet as needed with investors, and those who never meet with shareholders (except, of course, at annual meetings).

So, what are directors and owners talking about? Not surprisingly, given the relentless disruptions occurring in a variety of industries, strategy is a common focus. Investors want to know if directors understand and can clearly articulate where their companies are going. Nearly half of all respondents surveyed related that investors focused on company strategy in their in-person meetings, with no significant difference in company size—47 percent of respondents at larger companies and 46 percent of respondents at smaller companies indicated investors focused on company strategy during meetings.  Interest in other key topics did vary by company size, with a greater focus on CEO succession, oversight of risk management, and board composition among shareholders at larger companies. At smaller companies, there was a noticeably higher focus on CEO performance metrics and goals, board structure, and oversight of the organization’s culture. (See illustration 3.)

Illustration 3
Top Issues Raised by Institutional Investors When Meeting with Directors
(Respondents Could Select All That Apply)

Source: 2024 NACD Board Trends and Priorities Survey, n = 152

Another common topic was environmental risk, with investors raising this topic for discussion in 20 percent of board-shareholder meetings at larger companies, driven no doubt by extreme climate events in recent years, with their obvious impact on company profits and thus stock price and portfolio returns. Fewer than 20 percent of respondents (whether in large companies or small) reported discussing oversight of social issues, cybersecurity risk, company culture, or human capital with investors in the past year. This could indicate that the companies are already dealing well with these issues—although human capital disclosures are likely to garner more investor concern if the US Securities and Exchange Commission expands human capital disclosure requirements this year, as officially projected.

Directors themselves, when asked in that same Trends survey about their own top priorities for board self-improvement in the coming year, shared a focus on strategy. Their top oversight issue was strategy execution—with 81 percent of respondents stating that improvements would be “important” or “very important” for their board. They gave similar answers for strategy development.

Other top improvement goals for directors included risk management, cybersecurity, and oversight of human capital—including the nitty-gritty pay issues of high concern to owners. (Two of the rare shareholder resolutions that received a majority vote in 2023 focused on these issues—termination pay at Delta Airlines and CEO performance metrics at Rite Aid, according to proxymonitor.org.)

PREPARING FOR INVESTOR MEETINGS

As the 2024 proxy season unfolds, directors can take a number of actions to ensure their board is prepared, including these:

Foster communications and build the narrative: Boards should continue to foster informative and constructive communications with their shareowners in concert with their investor relations officer, drawing on the expertise of their fellow board members and outside advisors as needed.

Be prepared to discuss strategy: As highlighted above, shareholders are concerned first and foremost about company strategy. Directors who have been involved in shaping company strategy will be well positioned to explain it to shareholders and should be involved in the investor dialogue. This is not a time to let management do all the talking.

Consider links to compensation and succession: Directors need to be well informed about the details of compensation and succession in relation to strategy. In their communications to and with shareholders, directors will need to demonstrate insights and value contributed to these vital areas, which, if left unaddressed, can lead to unwanted shareholder activism.

Capture updates on shareholder relations: Directors can invite the head of investor relations to provide periodic reports on shareholder relations, especially during the company’s annual meeting season (typically, but not always, in the spring). Ideally, the chief financial officer will also attend to provide perspective on the capital allocation decisions that affect stock price and dividend decisions.

Consider investor relations’ preparation: If a company’s key shareholders have expressed concerns about a particular area of board oversight (e.g., risk management, executive pay, or board composition), then it would be advisable to have investor relations attend relevant parts of the appropriate board or committee meeting (audit, compensation, nominating and governance). Reciprocally, as a result of hearing the investor relations officer present in these meetings, directors can get a good sense of the quality of this function.

QUESTIONS DIRECTORS CAN ASK TO STRENGTHEN STRATEGY FOR BOARD-SHAREHOLDER RELATIONS

• How well do we know the company’s major shareholders? Is the company a target for activism? If so, why?
• Which shareholders have submitted proxy resolutions for the next annual meeting? Were there resolutions in the past? If so, what happened to the resolutions?  What are the likely performance vulnerabilities or governance weaknesses that investors will probe in our upcoming meetings?
• Are we as directors confident in the company’s decisions to include or exclude (via a no-action letter) shareholder resolutions?
• How is our stock performing right now—and why? Is the Total Shareholder Return (annually, over three years, and over five years) comparable to that of our peers?
• When was the last time we met with top owners? Is it time for another meeting?
• What is the investor relations officer’s assessment of the company’s current relations with shareholders?
• What percentage of shareholders voted yes in our most recent “say on pay” vote? How does this compare to previous votes? Are we getting a message we need to heed?
• Do our investors understand how the board provides oversight and guidance to management on business strategy and the oversight of risks and culture, with an eye to medium- and long-term performance?
• Do our investors understand how we evaluate our own performance—at both the full-board and individual-director levels—and how we act on the results of performance evaluations?
• How clearly do our communications to shareholders—written communications as well as those delivered in person—demonstrate the alignment between the company’s short-term activities and milestones, and our long-term strategic objectives?
• Does our proxy statement disclose the qualifications and skills of all directors in a compelling way?
• Is it clear from our disclosures that the nominating and governance committee carefully considered recommendations from shareholders?

Alexandra R. Lajoux is chief knowledge officer emeritus at the National Association of Corporate Directors (NACD). Mallory Bucher, Lucy Nottingham, and Ted Sikora also contributed to this article.