As public companies begin to think about preparing for next year’s proxy season, there are five steps they should focus on, as well as tips on how to prepare for contested M&A going into the next proxy season.
– Lawrence Elbaum, Vinson & Elkins
Top 5 Ways to Prepare for Proxy Season
Step 1
Know All That You Can — Gather Data
Companies should do a deep dive to analyze the results of their annual meeting.
There is a ream of data that emerges from voters at a company’s annual meeting. Usually held between May and July, companies shouldn’t wait beyond the summer to review and analyze the results of the shareholder vote.
Two key areas to review are the election of directors and executive compensation.
Why?
These are the two most visible topics that signal how shareholders feel about current leadership. To fully appreciate investor sentiment, review how the vote has changed — or not — over the past 3 to 5 years. If the vote is in the 8-10% range against directors and/or compensation, perhaps there’s a little blood in the water. If that percentage has been steadily rising over the previous years, it is probably time to formally pursue and inventory the feedback. Figure out who voted against and try to get a sense of why they voted as they did.
Likewise, in connection with every annual meeting, public companies are getting ISS and Glass Lewis recommendations about how shareholders should vote — providing another barometer for shareholder sentiment. ISS and Glass Lewis will have influence over your shareholder base, and concerns they note in their reports may impact voting patterns. If left unaddressed, their concerns could result in negative recommendations in the future.
Closely examine your shareholder vote, and gather all the data that you possibly can from your shareholders and proxy advisers.
Step 1: Gather data
Step 2
Understand What You Know — Benchmarking
Review your top 10-15 shareholders’ guidelines and policies that explain how they vote at shareholder meetings.
Companies should benchmark these policies against their own corporate governance policies and board composition election data to ensure they are tracking the right metrics from top shareholders, ISS and Glass Lewis.
Finally, combine the data from the annual meeting with your benchmarking research to make a list of the things you should be thinking about tweaking in the coming year.
Step 2: Benchmarking
Step 3
Add a Personal Touch — Go on a Shareholder Listening Tour
An in-person “listening tour” for Board members and senior management is a valuable way to ensure shareholders feel heard. The goals of such a tour are to:
- Offer shareholders the opportunity to engage at the Board and management level.
- Give shareholders an opportunity to provide feedback on why they voted the way they did.
- Let them evaluate and comment on the benchmarking you have done.
- Hear what shareholders think about your management policies and why.
By proactively opening up a face-to-face dialogue soon after the vote, you’re showing you value their insight and are actively taking it under consideration. You do not want to wait until too much time has passed and risk not improving the things that they want to see changed.
As part of your listening tour, ask shareholders for their views on your company’s M&A strategy.
- Do they want the company pursuing M&A?
- Do they want the company pursuing its standalone strategy?
- Do they want the company growing organically?
- What are their views on divesting certain assets?
- What do they think about restructuring the company’s balance sheet?
It is important to get a sense of the shareholders’ view on M&A beyond what they think about your Board and governance practices. Often there is a dislocation between what the Board and management are considering with respect to M&A and what shareholders are expecting. When two divergent views collide, conflict may arise.
Prepare for the tour as though you’re making a closing argument to a jury. Be concise, lay out your arguments for why the company has done what it’s done and articulate a cohesive narrative. Then, be willing to answer any and all questions. Show a willingness to consider the shareholders’ concerns, but remember that the company is paramount, and ultimately you can’t be all things to everyone.
Further, give shareholders the opportunity to sit down with directors, without management present, to show the Board’s independence. This also gives the audience a chance to hear a different voice, even one that’s staying on script.
Ahead of anything else, sit down with your advisers and build out a list of topics to address. Then build out a comprehensive question-and-answer document that spans from softballs (e.g., “How has the current leadership succeeded?”) to the toughest questions you could imagine (e.g., “Why is executive compensation so high while your stock price is down, and investors are losing money?”).
You should determine with whom you’re meeting. Are they C-suite executives or portfolio managers? Your responses may be different depending on the audience. Ideally, if they’re not one and the same, you want the person that makes the investment decision and the person that makes the voting decision in one room.
Step 3: Go on a shareholder listening tour
Step 3: Shareholder listening tour – M&A
Step 3: Shareholder listening tour - preparation
Step 4
Make a List
During the months following the annual meeting, keep track of the types of changes to the board composition, corporate governance practices, and business strategy that the Board and management are considering. It is good to show that the company is taking feedback seriously — whether via the vote results or in subsequent meetings — through contemporaneous record-keeping.
This means considering making tweaks in peacetime to show that the Board and management teams are proactive. If an activist campaign emerges, these actions can help undercut potential accusations of being unresponsive or failing to take shareholder concerns seriously.
A year-round, proactive, critical analysis of shareholder sentiment is a key strategy to help ensure a company’s investors are heard and acknowledged.
Step 4: Make a list
Step 5
Make a Plan
Considering the cost, effort and time that goes into a prolonged battle with activist investors, taking shareholders’ concerns seriously is crucial. By taking the steps above and building a comprehensive strategy to address and anticipate concerns, a company can position itself to get ahead of potential trouble.
With the next proxy season coming up quickly, it’s time to begin considering how to address potential issues that may arise. Dig into the data, identify voting trends, make a list and make your plan. Determine what you want your proxy statement and letters to shareholders to look like in the Spring with an eye toward the summer’s annual meeting. Then, be ready to get started again.
Those are the 5 steps that we would recommend boards and management take. Hopefully you have already started taking these steps — if not, it’s never too late, but don’t wait any longer!
Step 5: Make a plan
M&A Activism & Proxy Season
There has been a significant uptick in M&A activism, with an increasing number of proposed M&A transactions being contested. Public letters and other materials find their way into the press and social media, putting pressure on Boards and management to consider large shareholder concerns.
Boards, management teams and their advisers have one chance to announce a deal and convey the strategic importance of the transaction to their shareholders.
As an advisory team, we encourage companies to plan ahead. You want to have everything from deal terms, legal review and internal and external communications drafted as far ahead of time as possible. Build the narrative early so that all parties — from Board members to senior executives — are working from the same script. You want the news to be well-received as early in the process as possible to avoid shareholder sentiment moving against the deal.
Ultimately, many transactions will proceed and close, but sometimes not without a public fight. However, preparing in advance and anticipating shareholder challenges will strengthen a company’s standing even if, in the end, it’s necessary to make concessions to shareholders.
