On January 28, 2016 the Lead Director Network (“LDN”), joined by Glenn Booraem, fund treasurer and head of corporate governance at Vanguard Group, met to discuss their companies’ and boards’ relations with institutional investors. King & Spalding and Tapestry Networks published a report providing highlights of the discussion at the meeting.
Mr. Booraem and the members of LDN discussed the following three topics: background matters with respect to institutional investors and Vanguard, investor engagement with boards, and specific issues for boards to consider in connection with investor engagement.
Background on Institutional Investors and Vanguard.
Because of the wide variety of investors that fall within the “institutional investor” category, institutional investors can have highly varied strategies, objectives and structures. In the United States, institutional investors now hold almost ten times the available US equities that they held in 1950, currently holding over 50% of US equities.
Vanguard is one of the largest institutional investors holding $2 trillion in equity, approximately two thirds of which is in index funds, while the remaining one third is actively managed. Mr. Booraem discussed the internal structure that Vanguard has in place for casting all of its proxy votes, which includes the corporate governance team he is on, as well as a proxy oversight committee and individual funds’ boards of trustees. Mr. Booraem noted that Vanguard’s own philosophy on governance and policy includes focusing on the “longest of the long term” and empowering shareholders through issues like proxy access, while still maintaining respect for the board. Mr. Booraem further noted that contrary to many companies’ assumptions, Institutional Shareholder Services (“ISS”) and other proxy advisory firms often play a relatively limited role in determining a vote, and instead help Vanguard by compiling information for review.
Investor Engagement with Boards.
As has been the norm for several years, investor engagement is a key issue for public companies. A recent survey by PricewaterhouseCoopers found that approximately 70% of directors reported that their board regularly communicated with the company’s largest investors over the past year. As such, LDN members engaged Mr. Booraem on the topic, for an institutional investor’s perspective. Mr. Booraem observed that boards tend to respond favorably to requests for engagement. He also urged boards to be proactive in areas that might draw attention from investors, e.g. if the company has underperformed recently. By doing this, Mr. Booraem argued, a company has “the chance to have that dialogue and address the issue before an activist shows up.” The concern of a Regulation FD violation through investor engagement was discussed, though both Mr. Booraem and Cal Smith, corporate partner at King & Spalding, noted that Regulation FD issues can be managed by planning ahead and setting expectations appropriately.
Mr. Booraem also praised GE’s newly enhanced 10-K report and encouraged other companies to follow their lead and be more innovative in the area of disclosure. As he pointed out, investors often rely heavily on such disclosures and making them easier to review would only improve investor engagement and relations.
Specific Issues for Engagement.
LDN members and Mr. Booraem further discussed several governance-related issues that have been at the top of the agenda for both investors and boards, including proxy access, board composition, and the challenge of activist investors
- Proxy Access. Proxy access, or shareholders’ ability to add their own board nominees to the proxy ballot, has been an issue for several years, though it spiked in 2015. In 2015 over 113 companies received proxy access proposals (a 600% increase from 2014) and of those, 60% of the proposals voted on passed. With respect to the ownership threshold for proxy access Vanguard has changed its likely support of proxy access proposals from a 5% threshold to 3%. Mr. Booraem noted that “This change is informed by our engagement with companies and other stakeholders over the past year, as well as the critical mass of access adoption at the 3% ownership level by an increasingly wide range of companies.”
- Board Composition. LDN members and Mr. Booraem discussed the need to balance industry specific expertise with a broad business perspective when focusing on board composition. While Vanguard does not generally have “hard-and-fast requirements” when it comes to board composition, Mr. Booraem provided LDN members with some insight into how Vanguard makes its decisions regarding some important composition questions. For instance, when it comes to questions of overboarding, rather than having a specific maximum number of boards a director can serve on, Vanguard focuses on attendance numbers. Mr. Booraem noted that “an easy way to get a vote against a director is to not show up for meetings.”
- Activists. Like proxy access, activist investor activity has spiked over the past several years. In the first half of 2015 activist investors demanded the sale of 28 companies. Furthermore, a 2015 survey found that just the top 50 activist hedge funds manage over $200 billion in equity assets. As such, activist investors are an ever-increasing concern for companies; however, Mr. Booraem noted that institutional investors (such as Vanguard) may not be as quick to join activist campaigns as companies may worry. Instead, he again argues that companies should focus on remaining ahead of activists by ensuring that they have articulated their side of the story and strategy over time to institutional investors through consistent and honest engagement.
To see the full report, click here.