2022 Shareholder Engagement Trends and Considerations: ESG and Investor Outreach

As ESG remains a mainstay of board and investor focus, effective shareholder engagement is as important as ever, and as complex as ever, for ensuring that companies have the external support necessary to advance their long-term strategy. Failure to manage shareholder engagement could result in a company losing majority support on a shareholder proposal, having low director support or even losing a proxy battle.

An Edelman survey of 700 global institutional investors revealed that 88% of investors polled indicated that they subject ESG data to the same scrutiny as operational and financial considerations, while 82% of those polled believe that companies frequently overstate or exaggerate their ESG progress when disclosing results.^[1] In order to promote a successful ESG agenda, boards may need to acknowledge investors’ skepticism of current ESG disclosure and accede to their demand for standardized transparency, a demand the SEC itself is expected to embrace in forthcoming mandatory ESG disclosure rules.

In a similar vein, given that smaller institutional investors and activists have made clear that ESG engagement is a priority, boards would do well to reevaluate their criterion for investor outreach – and look beyond just the top 20 largest shareholders to establish and cultivate ongoing relationships with a broader group of shareholders in an effort to anticipate specific proxy season concerns.

Below, we discuss considerations for companies and their board members in crafting and executing an effective strategy for investor outreach and communication during both the proxy season and the off-season, with a particular focus on navigating shareholders’ interest in ESG initiatives and developments.

Considerations for the 2022 Proxy Season

In preparation for the 2022 proxy season and engagement with shareholders, companies and boards should consider the following in developing a strategy for engaging with shareholders and communicating with other stakeholders.

Strategize on Long-Term Plan

• Consider and be ready to discuss how key ESG and sustainability topics that are salient to the company and the industry relate to the company’s long-term plan. In PwC’s 2021 Annual Corporate Directors Survey, 64% of directors surveyed said ESG is linked to their company’s long-term strategy, but only 25% think their board understands ESG risks very well.^[2] Know who at the company is most knowledgeable and best positioned to respond to substantive requests from shareholders on ESG hot topics, and prepare them for more external-facing exposure if needed.
• Consider not just the risks that ESG-related issues present to the company’s operations but also potential opportunities that ESG goal-setting can present to the business. Consider opportunities where meeting sustainability targets will also contribute to increasing efficiencies or decreasing expenses, and be prepared to communicate these opportunities both externally to investors and internally to employees.
• Ensure there is consistent messaging among all constituencies (e.g., investors, employees, customers and suppliers) as well as across all channels of communication including securities filings, sustainability or other ESG reports and the corporate website. A unified and consistent message with robust shareholder communication builds support for the company’s long-term plan.
• Identify specific, quantifiable ESG-related measures that are aligned with the company’s corporate purpose and culture, and be prepared to demonstrate how these measures inform the company’s plans for growth and financial performance.

Know Your Investors

• Reevaluate shareholder outreach priorities. Continue to pay particular attention to the company’s largest shareholders and key stakeholders for regular outreach, but given the rise to prominence of smaller activist investors on ESG campaigns, consider broadening outreach efforts.
• Review investors’ stock holdings, published guidelines, policies, statements, voting history and involvement in campaigns for shareholder proposals, governance initiatives or activism, and focus on any recent adjustments, particularly with respect to ESG topics. Prepare to engage with investors on how the company is adapting to said adjustments and how key areas of focus for the investor fit into the company’s long-term plan.
• Understand the roles of different stakeholders within institutional investors. If management and directors are engaging with the portfolio manager but have no relationship with the investment stewardship team, shareholder engagement becomes less effective in anticipating concerns that may lead to proxy voting concerns.
• Consider how institutional investors’ policy changes may impact future shareholder voting. As BlackRock announced in late 2021, it will now give many of its institutional clients the ability to make their own voting decisions. While these investors likely have guidelines similar to BlackRock’s own, any differences should be areas of focus for companies in anticipating future voting trends.
• To the extent a company receives a shareholder proposal, keep an open mind. Directors often view a shareholder proposal as a line of attack or an escalation tactic, but more and more investors think of submission of a shareholder proposal as another strategic approach to engagement. Once an investor opens the line of communication with the company, the investor may be willing to discuss the issue and come to a resolution that results in a withdrawal of the proposal.
• If the company has received shareholder proposals from certain investors in the past or is aware that certain investors are known for submitting shareholder proposals, consider prioritizing shareholder engagement with those investors earlier in the season to gauge any particular concerns or objectives for this proxy season.

Review and Revise Disclosure

• Include voluntary disclosure regarding the company’s shareholder engagement efforts, feedback received from shareholders and how the company responded. Many companies are providing this information in their proxy statements in the summary, corporate governance and executive compensation sections and it is an area of focus for some investors.
• Consider feedback from stakeholder engagement when creating and updating public information, including disclosure, presentations, websites, sustainability reports, CSR reports and other publicity vehicles, including social media. Address topics about which there are misunderstandings or controversies (whether raised by analysts, media or shareholders, or conveyed privately to the company), whether company- or industry-specific.
• Ensure that the board, management and other members of the company coordinate to maintain current and consistent disclosure and communication with investors and other stakeholders.

Focus on Key Topics

• In the absence of mandated ESG disclosure requirements, benchmark ESG-related governance and other practices against similarly situated issuers, including competitors, others in the sector or index and others in a specific investor’s portfolio.
• Consider adding disclosure and reporting on key ESG-related concerns for investors, such as climate change and human capital management, that is consistent with existing frameworks and standards recommended by investors, such as the TCFD and SASB. Morrow Sodali’s findings in its 2021 Institutional Investor Survey point to climate risk as investors’ number one engagement priority, with human capital management a close second.^[3]
• Consider whether to link executive compensation practices to ESG-related or other sustainability measures, and whether investors may expect companies in your industry to do so, either based on competitor practice or apparent company ties to climate risk (e.g., oil and gas; transportation). If ESG measures have already been incorporated into executive compensation targets, continue to monitor progress throughout the year toward achieving these measures (similar to other financial and operational metrics).
• Board refreshment continues to be an area of investor focus with respect to corporate governance, and Nasdaq’s and California’s director diversity requirements reinforce a regulatory focus on board composition. Both ISS and Glass Lewis have also emphasized prioritizing racial/ethnic and gender diversity. For additional information, please see Diversity Issues Remain at Center Stage, and the Show Is Just Getting Started in this memo.

Other Process Considerations for Engagement

• Determine who will be best-positioned to engage directly with investors on a particular topic or issue:
  • Management participants usually include an IR officer and the CFO, the general counsel or corporate secretary to discuss governance items; the CEO if there are controversies in the market relating to strategic direction; and, in some cases, the heads of specific business units of interest. In light of increased interest in ESG-related issues, consider including the chief sustainability officer, if there is one. Prior to any engagement efforts, ensure that there is a record of refreshed Regulation FD training for management participants who will be regularly interfacing with stakeholders.
  • Many large institutional investors, especially top shareholders, increasingly expect to be able to directly engage with directors, in particular on questions regarding strategy. Navigate the balance of director involvement in shareholder engagement with the board’s relative expertise. For example, it is important to make sure that directors are not placed in situations where they are unable to adequately respond to particular investor concerns on the technical nuances of ESG developments. Instead, consider who in the company is best positioned to have conversations on ESG objectives. The chief sustainability officer or general counsel may be able to more effectively manage shareholder concerns on ESG progress.

If director involvement is necessary, directors should be joined by a member of management familiar with the shareholder and trained on how to most effectively engage on these issues. Prepare directors for shareholder engagement with key talking point and potential topics that may run into securities law issues, including Regulation FD.

[1] Edelman, “2021 Trust Barometer Special Report: Institutional Investors” (November 17, 2021), available here.

[2] PwC “2021 Annual Corporate Directors Survey” (2021), available here.

[3] Morrow Sodali, “Institutional Investor Survey 2021” (May 11, 2021), available here.