Many clients are now turning from their annual meeting to plans for off-cycle engagements with their institutional investors, including the passive strategy behemoths (Blackrock, State Street and Vanguard which tend to own, in the aggregate, around 20% of many of our mid- and large-cap clients), traditional actively managed funds, pension funds, and hedge funds. The rationale for these meetings is that postponement of outreach until a threat of a contested situation (such as a short-slate proxy contest or aggressive shareholder proposal) may be “too little, too late” and that these one-on-one meetings on “sunny days” (and even “partly cloudy days”) are critical, if not for locking up support, at least for establishing a foundation for obtaining support if and when the storm clouds arrive.
Notwithstanding the chorus of shareholder-engagement advisors singing the praises of holding these off-cycle meetings (ourselves included), as well as public statements by the investors themselves in favor of such meetings, the truth is that the upside of these meetings is somewhat limited and the downside risks are significant. When pressed, any investor will tell you that, if there were an actual proxy contest, even a company with a record of excellent off-cycle engagement is far from immune from a decision – often reached at the 11th hour of the proxy contest – by the investor to vote in favor of a short-slate proposed by an activist. More importantly, a poor off-cycle meeting can be more detrimental than no meeting. Indeed, investors report that they regularly leave these meetings with a worse impression of companies. Moreover, since many of a company’s institutional stockholders will each hold portfolios consisting of hundreds or even thousands of issuers, many of these stockholders will not take a meeting each year due to limited bandwidth, which thereby amplifies the adverse consequences of a poor meeting.
In view of the meaningful risks of these off-cycle meetings, we have compiled these guidelines and tips based on direct feedback from a spectrum of investors over the past six months, as well as experience prepping clients for these engagements following recent proxy seasons.
- When? Late summer through fall is the relative downtime for most institutional investors and therefore the best time to request a meeting in the absence of a time-sensitive issue.
- What information to include in the meeting request? Propose a list of topics to be covered and company representatives to attend. This advance information allows investors to evaluate the need for a meeting and, if the agenda and attendee list reflect the guidance below, will increase the chances of getting on the calendar for a constructive meeting. Expect comments on the proposed topics and attendees in advance of the meeting.
- Be sure to highlight any specific recent development – e.g., a recent Schedule 13D or analyst report that asserts some misguided ideas for strategic alternatives – that the company would like to address at the meeting. Many investors, due to the breadth of their portfolios, may not be aware of these developments which merit a meeting and in the absence of this specificity, may turn down a meeting they would have otherwise accepted.
- Which stockholders? In addition to the top 20 holders in the company’s profile, some smaller institutional holders may be worthwhile meeting as they can turn out to be among the most vocal holders. This is especially the case for pension funds, which often fail to show up on radars since they do not necessarily file 13Fs – but they do make shareholder proposals, partner and regularly communicate with and invest in activist hedge funds, and publish open letters criticizing issuers on a range of operational and ESG matters.
- Telephonic or in-person? It is advisable to be flexible on the format of the meeting. Preferences and availability of investors vary.
- Who should attend from the company? While only about a third of off-cycle engagements involve the participation of a non-management director, investors generally want to hear in the initial meeting request that they have the option of having such a director join the meeting. If potential misunderstandings relating to compensation, board composition/refreshment, internal controls over financial reporting, capital allocation, or strategic alternatives are on the agenda, the presence of a director who can speak to these issues (e.g., the chair or member of a relevant committee) will be of greater importance and the participation of that director is more likely to be of interest to the investor. Keep in mind that the stakes increase significantly when a non-management director is present and therefore prep sessions with the director are advisable. The head of IR should attend all meetings with shareholders (although director-only meetings may occur rarely (and require even greater preparation)) and other participants may include the general counsel or corporate secretary when governance items are on the agenda, the CFO and, if there are controversies in the market relating to the strategic direction of the company, the CEO. In addition, when a specific business line will be an agenda item and there have been doubts from analysts or investors about the direction or status of this business line, some investors appreciate the opportunity to hear directly from the head of this business line.
- What topics should the company cover? In addition to covering topics about which there are misunderstandings or controversies in the market (either raised publicly by analysts, media or activists or conveyed to the IR team offline), the agenda and presentation from the company will vary to some extent with each investor.
- Generally, investors will want to hear about the vision for the long-term, including an analysis of the factors that will help and hinder growth. Plan to spend a quarter to one-third of an hour-long meeting reviewing company business and strategy. Drawing from investor day and analyst conference presentations is okay, but focus on using only those slides that review the long-term plan and minimize jargon and acronyms – the target audience here is comprised not of sector analysts building quarterly models, but of folks focused on a holistic, longer-term vision. For instance, divisions that the company views as generators of growth in the more distant future but that are not currently drivers of results can be fruitful subject matter at these meetings even though they may be of little interest on quarterly earnings calls. In addition, keep in mind that some of the participants from the investor, especially those focused on stewardship and governance, may not have a deep background in the company’s business plan.
- Governance, board composition, and board processes should be covered as well. A review of the investor’s published guidelines, policies and statements, as well as their voting history and involvement in campaigns for shareholder proposals, governance initiatives or activism, will provide helpful insights on how to craft your presentation about governance and how to refine these materials for each investor. In addition, even though many investors no longer strictly adhere to ISS or Glass Lewis recommendations, many still use data generated by those services and it is advisable to correct any material misunderstandings in the latest reports and address any significant criticisms from the proxy advisory firms.
- Benchmarking governance and other practices against similarly situated issuers is encouraged by and helpful to investors, but companies need to be thoughtful when benchmarking. Take into account in advance the other issuers that are in the portfolio of the investor, whether the investor looks to ISS’ definition of peers, and which other companies the investor has mentioned during past communications.
- Address environmental and social responsibility as they relate to the sustainability of, and are components of, the growth plan of the company. Investors are not interested in hearing about recycling bins, headquarter LEED certifications, or pro bono community initiatives. They are interested in the extent to which the company is taking steps to assure that the company’s ability to create value will not be impeded by adverse impacts that may arise from neglect of environmental and social matters.
- Prepare an internal Q&A in advance. Investors often ask hard questions about challenges faced by the company and its business plan that differ from the questions on analyst calls which tend to be focused on a shorter term.
- What signals to watch out for and to seek out and what to do with them? Management regularly reports internally that their shareholders love them, only to be left in the awkward situation, when an activist surfaces, of having their board learn that the support is not unconditional and was overstated. These off-cycle meetings provide excellent opportunities to engage in dialogues and learn what the investors do not fully understand and what they view as areas of concern. It is appropriate for representatives of the company to probe the investor representatives about these topics. Issuers should aim to come away from these meetings with ideas on what reforms to consider internally and what disclosure to improve. In addition, it is advisable to deliver a summary report-out to the full board about the positive and less-than-positive feedback and what management’s action plan is in response to the latter (which may well be making no strategic, procedural or structural changes, but simply improving the way the company’s story is told).
- Any disclosure requirements? Generally the filing of the presentations for off-cycle meetings will not be necessary to comply with Regulation FD, but it is worthwhile to revisit this question with each presentation, especially if selected financial targets of long-term plans are disclosed. If and to the extent any information in these presentations is not material but not yet publicly disclosed, the company should consider the benefits of and right occasions for disclosing some or all of this information more broadly. In addition, a company will earn points with proxy advisory firms and some institutional investors by including disclosure in the next annual meeting proxy statement about the extent and nature of your off-cycle engagement program.
 For a more detailed analysis of the current investor landscape and its impact on corporate strategy, see https://www.clearygottlieb.com/news-and-insights/publication-listing/activism-in-2018-bod-1-9-18