Thought leadership
DFIN’s approach to the proxy

By Ron Schneider, director, corporate governance services at DFIN

DFIN’s approach to the proxy

By Ron Schneider, director, corporate governance services at DFIN

DFIN is proud to participate with Governance Intelligence in this important playbook, which features insights and actionable advice from some of the savviest ‘proxy communicators’ in the country.

Having spent the first half of my career supporting companies as well as activists in proxy fights, I have seen first-hand the value of companies using the proxy to effectively convey their stories around strategy and performance, the board, executive pay and sustainability or impact.

In fact, at a recent governance event, one M&A advisor told the audience that activists succeed in gaining board seats three times as frequently when the target company had a recent poor Say on Pay vote, or other governance controversy, compared to

if the target company does not have additional issues they can capitalize upon. Clear, quality proxies can help to mitigate these controversies.

Two things almost all companies immediately do when confronted by an activist:

Ramp up (or initiate) engagement with the majority of their larger investors, and
Sharpen their messaging around strategy, the board, executive pay, sustainability or impact and any other topics of interest to their investors.

Since that is what you will do in these situations despite how remote they may be, why wait?

The companies cited in this playbook use their proxies to put their best foot forward – now. Rather than being a ‘nice to have’, a clearly written, confidence-inducing proxy that fully reflects your company’s strengths and best practices is a ‘must have’ to protect executive leadership and the board. If you don’t tell your own story effectively, don’t expect investors to figure it out and give you appropriate credit.

How should you proceed?

Recognize that the proxy is increasingly a board-centric document.

Beyond the election of directors, their biographies and director compensation, board-related issues investors focus on include:

Board oversight of a rapidly expanding array of issues, including company strategy and performance, executive performance and succession planning, enterprise risk, executive pay, human capital and sustainability or impact programs, cybersecurity, AI and who knows what else is around the next corner.
Board refreshment to ensure directors have the competencies required to effectively oversee an expanding array of issues.

Shareholder engagement, including board and executive participation, has intensified amid heightened investor expectations following sub-par votes. In addition to understanding the scope and participants in engagement, investors want to know what topics were discussed and what – if any – actions the company took in response (i.e. ‘responsiveness to the vote’).

With universal proxy, investors in director election contests can now choose from all nominees, not just between ‘slates’. As a result, the question they will be asking themselves becomes What does each nominee, irrespective of who is nominating them, uniquely bring to the board? This is causing companies to revise biographies to highlight each nominee’s unique skills and contributions within the board’s overall competencies.

2. To the extent possible, tie all major messages to the business strategy you have been communicating through your IR efforts:

We heard this from multiple companies cited in this playbook. This includes:

How the board’s current composition, ongoing evaluation and refreshment programs ensure it has the right mix of skills and experience to effectively oversee an array of issues given the company’s current stage of growth, competitive environment and strategy.

How the executive compensation program supports the business strategy. This includes explaining clearly the rationale or link to business strategy of any pre-set performance metrics. Such credible explanations can mitigate the impact of negative proxy advisor vote recommendations.

How the company – beyond measuring and reporting on its human capital and sustainability activities – has operationalized specific aspects or programs that have a clear through-line to long term shareholder value (cutting through the noise of often broad-ranging programs seeking to address multiple overlapping reporting regimes).

3. Given the multiple audiences a proxy must serve, focus on the needs of the large, indexed investors, including the ‘big three’ of BlackRock, Vanguard and State Street Global Advisors.

First, having C-suite and even board buy-in so that your company is telling its best stories in the proxy now is very helpful – and perhaps necessary – to ensure you have the support and access you require. Our guidance, which we apply when working directly with clients, is three-fold:

These and similar investors may collectively control and vote 20 or 30 percent of your shares. Rather than ‘pick’ companies, they own full indices. This means that they don’t have the level of knowledge of each portfolio company’s business, strategies and leadership as do ‘active’ managers, whose industry analysts and portfolio managers ‘kick the tires’ before investing in a company. Even for household name companies, indexed investors likely aren’t aware of their latest strategies, yet they do want to vote thoughtfully. Doing so would require they read or research multiple documents including the proxy, annual report, sustainability report, IR website and investor deck or analyst research reports, in addition to proxy advisor reports and related vote recommendations.

These investors often report not having the time or bandwidth to do this before voting and may only crack open the proxy for a portion of an hour. For these reasons, companies are including increasing amounts of voluntary or ‘non-SEC required’ information in highly visible locations to make the proxy a more inclusive, standalone and persuasive document.

Substantive CEO or board cover letters, as well as proxy summaries covering well-selected topics, can provide the all-important ‘tone from the top’ including what the company feels is most significant about the prior year.

‘About the company’ or ‘IR 101’ sections, repurposed from current IR disclosures, help them better understand your company.

Despite ESG backlash, most investors remain convinced that climate risk is investment risk. They value seeing highlights of the human capital and sustainability programs, distilled from current sustainability reporting, in the proxy, including the all-important board oversight aspect.

Tactically, consider doing the following:

▢ Review all investor input whether via investor engagement, the IR dialogue and the past year’s voting, and seek to address these issues in your next proxy.

▢ Regularly benchmark your practices and disclosures against those of your peer companies and of other leading companies. As these companies are regularly ‘upping their proxy game’, both the floor of acceptable disclosure and the ceiling of investor expectations are constantly rising. Standing still isn’t an option.

▢ To this end, DFIN annually publishes a Guide to Effective Proxies, a searchable catalog of leading proxy disclosures from companies we work with, organized into over 40 sections, topics and features. We read 1,000 proxies so you don’t have to!

▢ Review your internal and external proxy teams to ensure the right people and perspectives have seats at the table. These internal teams can include legal, IR, risk, financial reporting, communications, HR, benefits or executive comp, sustainability and others, with regular CEO and board input as well.

▢ As more stakeholders are incorporated into the proxy process, more companies are leveraging proxy software solutions to help streamline workflows and improve efficiency. Here at DFIN, we’re seen a dramatic increase in our proxy clients drafting, designing and filing their proxies using our design-friendly SEC filing and reporting software ActiveDisclosure. Learn more about how ActiveDisclosure can streamline your proxy process, by vising us here.

Here at DFIN, we’ve seen a dramatic increase in our proxy clients drafting, designing and filing their proxies using our design-friendly SEC filing and reporting software ActiveDisclosure

To discuss how DFIN can support you in applying this playbook to your own company’s situation, get in touch today!