Stockholder Engagement: Cooperation, Confrontation or Tacit Standoff?

Ed Batts
5 min readMar 23, 2017

Companies, and in particular boards, can no longer rely on ad hoc interaction with proxy advisory firms to “check the box” on stockholder engagement on governance issues. This SVDX/Rock Center panel addressed the evolving landscape of stockholder communications in light of increased profiles of institutional governance departments. What are best practices for board and company engagement with stockholders? How can the company proactively think about topics of particular attention, such as proxy access, board diversity and tenure, exclusive forum bylaws, director nominations/elections and executive compensation?

Stockholder Engagement Panelists

Aeisha Mastagni is an Investment Officer III within the Corporate Governance Unit of CalSTRS, the nation’s largest teacher retirement fund. Her main areas of focus are the corporate engagement program, executive compensation, and selecting and monitoring managers in the activist manager portfolio. Aeisha previously worked for CalPERS overseeing the proxy voting program and the corporate governance manager portfolio.

Aeisha is often asked to speak at conferences to communicate CalSTRS position as an institutional investor on a variety of topics, including executive compensation, audit and accounting issues, and engagement with portfolio companies. She was named one of the “40 Under 40, Freshest Talent at the World’s Largest Asset Owners” by aiCIO Magazine, two years in a row. She is on the Board of Directors at the Golden 1 Credit Union and the Board of Governors for the International Corporate Governance Network.

John Kispert, Managing Partner, Black Diamond Ventures; Director, Cypress Semiconductor, Extreme Networks, Gigamon, and TriNet

A Managing Partner at Black Diamond Ventures, John Kispert is a recognized leader in Silicon Valley on achieving sustainable corporate growth both organically and through mergers and acquisitions. While CEO of Spansion, Inc., he led the company’s turnaround out of Chapter 11 bankruptcy into a growing, profitable company that employed nearly 4,000 people worldwide with annual revenues of over $1 billion, and later completed a merger of Spansion with Cypress Semiconductor. He also has extensive experience working with corporate and government leaders throughout Asia and Europe.

John currently serves on the board of several public and one private company (Tela Innovations). He previously held leadership roles for SEMI, a global industry association representing the Semiconductor Equipment industry on issues worldwide.

Paul DeNicola,Managing Director, Governance Insights Center, PwC

Paul DeNicola is a Managing Director at PwC’s Governance Insights Center where he works to extend the firm’s thought leadership in the area of corporate governance. A speaker at forums for directors and governance professionals, Paul also advises boards and executive teams on emerging governance issues. He has twice been named to Directorship Magazine’s list of the 100 most influential people in U.S. corporate governance.

Paul was honored as a recipient of the Rising Star Award from the Millstein Center for Corporate Governance and Performance at the Yale School of Management. Paul is also an Associate Professor at New York University’s Stern School of Business where he teaches courses in corporate governance and professional responsibility.

Moderator:
Ed Batts, Partner and Global Co-Head, M&A and Private Equity Group, Orrick

Ed Batts is the global co-head of Orrick’s M&A and Private Equity Group. He regularly counsels publicly traded technology companies in complex mergers and acquisitions, corporate governance and cyber-security. His areas of expertise are M&A (fiduciary duty counseling of public boards, cross border transactions, tender offers and going private transactions), Corporate Governance (board matters and public reporting obligations, including activist investor situations, stockholder proposals and accounting related issues) and Cyber (crisis management of significant cyber-security incidents as well as advice on regulators, plaintiffs and law enforcement.)

Ed advises on board matters and public reporting obligations, including activist investor situations, stockholder proposals and accounting related issues. In addition, he has regularly represented registrants and underwriters in primary and secondary equity offerings.

This program, like all SVDX programs, was subject to the Chatham House Rules. Kim Le, in the introductory photo above was not on the panel but is the President of SVDX.

Stockholder Engagement Discussion

Vote proxies, engagement, manage portfolios, address market-wide initiatives. These were some of the key activities discussed by the panel. Last year, proxy access and majority vote were two of the hottest topics in corporate governance. CalSTRS generally initiates stockholder engagement by sending letters first. If companies are not responsive, CalSTRS may file proposal.

In negotiating, always know what the other party is after. It may not be money. Often, it has something to do with reputation. Maybe they want someone’s “head on a stick.” Corporate staff should know a fund’s shareholder policies and the right people to talk with before engaging. Similarly, fund staff need to know if they should be talking to management or to members of the board. In most cases, management will do just fine but fund staff may want to talk with compensation committee members regarding pay or nominating committee members concerning board diversity.

More directors are meeting with investors than before but many are still afraid of falling into a trap. A proactive program should determine who visits whom. Sometimes directors are approached about possibly serving on another board but the agenda is really getting information about the board they currently serve on. Sounds like phishing to me.

The demands of being a director are increasing. Over-boarding has become more of a concern. Diversity is another concern amongst shareholders who want to see a diverse skill set. Know how to explain your company’s strategy before stockholder engagements. Continuously test your articulation with constituents. Think of their needs and your needs. There is a move toward younger directors in filling spots but I think directors have been staying longer. Boards are engaging 3 rdparty consultants, especially on cyber. Activists show up because of poor strategic decisions and the probability that some directors need to be removed. Having most board members be ex-CEOs is not a plus with many shareholders. There are usually many issues before shareholders ask for engagement.

Dual-class and nonvoting. CalSTRS and several other mostly indexed funds are bot IPO buyers but they do own companies with dual-class shares when they become part of the index. The Council of Institutional Investors and others will be look to sunset such provisions.

Next month’s program is on dual class shares. Virtual meetings, it was claimed, are more open to non-shareholders. Enhanced disclosure in the proxy was another topic briefly touched on.

Too much cash, stock down, history of poor capital allocation are among the factors that can drive desire for a meeting by stockholders. Tax reform will up the heat for special dividends, buybacks, M&A.

Wrap from from WMS media Inc.

Also of interest, Evolving Ways of Shareholder Engagement is Part 4 of my coverage of the Corporate Directors Forum 2017 in San Diego . Posted on February 28, 2017.

Stockholder engagement is the common theme of three videos offered up February 13, 2015.

Originally published at https://www.corpgov.net on March 23, 2017.

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Ed Batts
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Ed Batts is a Palo Alto, California-based attorney who serves as partner at Gibson, Dunn & Crutcher LLP.