Board Engagement: What It Means for IROs and How to Lean In
Increased focus on environmental, social and governance performance is bringing Boards of Directors out of the shadows and into the mainstream of stakeholder engagement, with implications for IR teams.
Some IROs are leaning into this trend by helping their Boards establish a presence in the marketplace through different forms of outreach. In this issue of IR focus, we examine these emerging practices by sharing ideas from those who are leading the way.
The Context for Engagement
Challenges facing corporations today – and by extension their Boards and stakeholders – are very different than they were a decade ago. Climate change risk, global supply chain/trade risk, demographic risk (the aging of the workforce), social inequality, Indigenous rights and other important ESG factors are converging on companies, adding complexity to the challenges facing Boards as they exercise their fiduciary duties and wrestle with what it means to be a good corporate citizen.
In a recent research paper entitled: 360˚ Governance: Where are the Directors in a World of Crisis?, Peter Dey (author of the 1994 Dey Report: Where Were the Directors?) and Sarah Kaplan argue that Boards must “reflect the current environment” and upgrade their governance standards. The paper sets forth 13 guidelines for Boards to use. Several speak directly to the need for greater Board engagement with stakeholders, including ideas for the:
- creation of separate stakeholder committees that would “function in a manner similar to audit committees” and assist Boards in carrying out their “larger strategic responsibilities for responding to stakeholder interests”;
- adoption of a system that would allow Boards to weigh in when a company chooses to take a position on an issue of social or political importance (The Walt Disney Company’s response to the State of Florida’s so-called ‘Don’t Say Gay’ law is a perfect example of the relevance of such a system); and
- expansion of the skills matrix used by Boards to assess existing and desired director competencies to include knowledge about key stakeholder issues.
The rise of activism (among shareholders and other stakeholders) means that directors increasingly find themselves thrust into the ESG limelight. Accordingly, directors must have expertise and experience in areas that in the past might have seemed tangential to their duties, but they also need to develop channels to share their views with, and gain reliable insight from, key corporate stakeholder groups. In presenting 360˚ Governance ideas to a meeting of the Governance Professionals of Canada last February, Dey and Kaplan suggested that every Board should make an effort to identify relevant stakeholders in their corporations, including any "actor or group that is associated with the creation or destruction of value by the firm at any stage of the lifecycle". The Report also ascribes special status to Indigenous peoples, given their inherent rights.
While the companies surveyed for this article have not adopted the Dey and Kaplan guidelines, they are not standing still.
How IROs Are Involved in Board Engagement
IR teams are adapting to an era of greater Board engagement with stakeholders. IROs interviewed for this article are using a variety of methods to support Board engagement beyond the standard fare of providing written IR reports. While invaluable, IR reports do not bring about the personal engagement between directors and shareholders or stakeholders that is now increasingly coveted. One method is to organize a series of one-on-one meetings between institutional shareholder groups and designated directors (usually the Chair of the Board and the Chair of a committee such as ESG or human resources/compensation). These are held in advance of the most formal engagement event of the year – the annual shareholders’ meeting – and always include two Directors to support each other and keep track of conversations for future reference.
The practice of holding one-on-one meetings is not new. In an effort to influence voting outcomes, many companies have long held consultations with institutional shareholders in reaction to proxy advisory recommendations. What is new and perhaps still uncommon is for companies to hold these engagement sessions extensively every year regardless of the voting recommendations issued by proxy advisors. For the few companies that appear to use this approach, the content of discussions between their directors and institutional holders skews toward environmental and social risks rather than just compensation topics.
Said one IRO: “We started doing these meetings on a one-on-one basis as an annual best practice a couple of years ago and while sometimes they afford our Chairman the opportunity to comment on an ISS, Glass Lewis or other analyst report, the central idea was to create a direct feedback mechanism between the Board and our institutional holders. Our Board views these engagements as highly relevant to their understanding of our owners’ concerns and institutions tell us they appreciate the personal dialogue. And for sure the dialogue of these meetings has moved into the social and environmental realm and includes equity, diversity and inclusion. The agenda is set by our shareholders, not us, so we have to prepare our directors for all potential ESG topics.”
Direct engagement with stakeholders is seen as a great way to demonstrate the quality and strength of a company’s Board and to explain how ESG risks are governed within a Board’s committee structures. Said one IRO: “Our directors all have tremendous business experience that shareholders can read about in our proxy, but nothing beats meeting our directors in person, hearing them speak knowledgeably about ESG issues and fielding shareholder questions with aplomb. Personal meetings build confidence better than any circular ever will.”
IR focus spoke to the head of one large cap Canadian company’s IR team who organizes such engagement opportunities annually for her Board. “We select institutional shareholders based on size of holdings but also invite institutions if our interactions with them during the year as IRO tell me that a Board presentation would be valuable to them and to our directors. Compared to traditional IR meetings that we arrange for our CEO and CFO, Board meetings with passive investors tend to be much more prevalent as a result of ESG.”
Sustainability Days and Say on Climate
Shareholder engagement on climate-related matters is growing, as are calls for companies to adopt Say on Climate advisory votes. The first Say on Climate vote – the brainchild of British fund manager Christopher Hohn – was instituted at Aena, a Spanish airports group, in 2020. Since then, heavyweights such as Unilever, Glencore, Canadian Pacific Railway, Canadian National Railway, Rio Tinto Group and BHP have adopted the practice of allowing investors to vote on their climate plans.
Boards need to consider the implications, including on the duties of their directors, and whether they wish to put forward their own Say on Climate resolutions rather than waiting for shareholder proposals that may (or may not) be workable and appropriate. Boards must also wrestle with concerns expressed by some institutional shareholders that such votes transfer accountability for climate outcomes from Boards to their shareholders.
Against this backdrop, IROs are contemplating ways in which they can assist their shareholders in better understanding the complexities of measuring emissions and setting targets. The hope is that more informed shareholders will make more informed decisions during future Say on Climate votes.
Enter the idea of hosting a Sustainability Day. While not part of the mainstream in Canada, this has appeared on the engagement calendar of at least one European-headquartered company. Air Liquide dedicated March 23, 2021 to presenting new objectives for “climate and society” and its growth ambition for hydrogen energy.
A Sustainability Day provides companies with the opportunity to delve deeply into ESG topics to help shareholders (and other stakeholders) better understand key concepts such as the three scopes of GHG emissions and explain the likely future impact of climate change regulations/taxes on the sales of company products/services. Unlike a standard Capital Markets or Investor Day, a Sustainability Day is entirely focused on providing context on a Board’s ESG framework, sustainability targets and CSR assessments. Sustainability Days do not need to feature presentations from directors only; in fact, for most companies, the real experts are employed in management. But events like this build profile for directors and expose them to direct feedback from stakeholders without management serving as information gatekeepers.
As more companies gain traction with their ESG strategies, and therefore have more meaningful information to disclose, Sustainability Days may become a mainstay of Board engagement in future. If that happens, IROs will be front and centre in orchestrating those meetings – the same way IR teams take the lead in organizing Capital Markets events. (A less ambitious but still potent form of engagement can take place when the Chair of a Board is a featured speaker during an Investor Day, an approach some companies use from time to time.)
Whether special events become the norm or not, IROs interviewed for this article noted that their Boards are increasingly interested in ensuring that shareholders have a deeper understanding of ESG practices and expect IR departments to assist in the effort. As one IRO said, “my team is a lynchpin in the communication effort and it’s key for us to develop a trusting relationship with the Board.”
Insight is Critical
IROs who create engagement opportunities for their Boards are deeply involved in sharing advance market intelligence on each shareholder group and preparing presentation materials for director use. A company’s human resources team contributes heavily to the development of most shareholder presentations used by directors as executive compensation is typically a hot-button issue. But directors want (and need) to talk about many other ESG topics during these engagements, including equity, diversity and inclusion. Gathering information on environmental management with the help of internal experts is also in the purview of IR teams crafting presentations for Board use.
“Today’s IR team needs to have a strong level of insight into the topics that will be raised during meetings between directors and shareowners,” commented one IRO. “It’s a case of coming up the curve and being educated on topics such as carbon emissions…how they are calculated and the assurance process behind reporting. We have to be sufficiently knowledgeable to be of value to our Board so they can engage with shareowners and we can engage on their behalf.”
Independence is a Must
While IROs are intimately involved in arranging Board engagements, those we spoke to do not attend meetings between Board members and shareholders. This helps to maintain the appearance of independence for the directors, which is imperative.
“Our presence at meetings might or might not be a distraction and it might or might not be welcome by shareholders, but we make it a policy not to attend,” said one IRO. “While it means we don’t know exactly what gets discussed behind closed doors, our directors will tell us after the fact if there is something we need to know. It works well for us.”
IROs we spoke to are rarely surprised at the tone or content of these engagement meetings because IR teams often speak to shareholders about ESG topics and many conduct formal shareholder perception surveys. But as one said: “The idea here isn’t about giving me insight, it’s about our Board and what they learn and hear directly by talking to our owners. They get the unvarnished truth directly from the source and the exercise is good because both our directors and shareholders come away feeling they were heard.”
Policies on Engagement
Some companies have adopted written Board engagement policies that explicitly commit Directors to active engagement with stakeholders, and state that the responsibilities of their Board Chairs include meeting with shareholders, stakeholders and regulators. In this context, it is entirely reasonable to expect Board engagement requests to come from groups beyond shareholders, including representatives of Indigenous communities, trade unions, consumer advocates and other key stakeholders. IROs we spoke to do not, as a rule, get involved in such meetings, with one exception. Stakeholder advocacy groups often muscle their way into the engagement circle with IROs (and Boards) by owning shares, even small amounts, and using the power of their public platforms/profiles to be heard.
This spring, Shareholder Association for Research & Education (SHARE) – a unionized, not-for-profit organization dedicated to promoting the responsible investment of workers’ capital – filed shareholder proposals related to Indigenous inclusion at several companies. These companies included Toromont Industries Ltd., BCE Inc. and Onex Corporation. Through engagement, iA Financial saw a similar SHARE proposal withdrawn before its annual meeting. Separately, Industrial Alliance Financial Group received a shareholder proposal from the Mouvement d’éducation et de défense des actionnaires (MEDAC) asking for it to become a “benefits company,” one in which the corporate purpose is defined as creating a positive impact on society and the environment. MEDAC regularly submits proposals to financial services companies and is one of many groups that actively advocate for causes it believes are important.
Meanwhile, Canadian Capital Stewardship Network (CCSN), a network of labour-nominated trustees on pension fund boards, recently hosted what it called a Proxy Power webinar to bring public attention to labour rights in supply chains, wages, taxes, social protection, precarious work, freedom of association and racial justice in the workplace. The webinar singled out companies including Loblaws Inc., Restaurant Brands International Inc., Amazon.com Inc., Dollarama, Walmart Inc. and SNC-Lavalin Group Inc. IR teams and directors should contemplate how they wish to engage with groups like CCSN if and when the need or opportunity arises.
Helping Boards Stay Grounded
Interacting with movements such as SHARE and CCSN may not be voluntary for some companies, particularly when shareholder proposals are filed, but as one IRO at an affected company noted: “It’s necessary for me to know about advocacy groups, understand their approach on issues and facilitate discussions for our Board with them when necessary. But the key thing IROs need to remember is not to let any single group hijack the corporate agenda. It’s very clear that the health of the company as a whole is what’s important and the actions of a single-issue advocate can be a real distraction and sometimes even the best attempts to negotiate land at an impasse. IROs need to help their management teams and Boards stay grounded and focused.”
Disclosing Engagement
Some IROs we spoke to noted an increase in interest in public disclosure of how often Boards engage with their stakeholders, the nature of those engagements and the outcomes. (Proxy advisors ISS and Glass Lewis also expect such disclosure if a shareholder vote failed to achieve 80% support in the prior year.)
Engagement reports are now a common feature in management information circulars, but the level of detail varies. For example, Onex reported that it had interacted with shareholders “representing more than 57% of its subordinate voting shares in the past 12 months.” iA disclosed that the Chair of its Board met virtually with “several institutional investors to discuss, among other things, the Corporation’s strategy, governance and sustainability vision.” TD Bank noted that “in the course of 23 meetings with institutional shareholders in 2021, the Board/Corporate Governance Committee (CGC) Chair and Human Resources Committee (HRC) Chair discussed ESG matters raised by shareholders.”
IROs reached for this article offered that there is no standard best practice in disclosing the level of Board engagement, but more interaction and more disclosure are positive as they indicate a willingness to be transparent and a desire, on the part of directors, to understand the perspectives of key stakeholders.
One novel idea to demonstrate engagement is employed by Air Liquide. It has taken to posting “answers to letters from shareholders” on its website. This is not a common feature of engagement except in proxy circulars when shareholder proposals are conveyed along with management responses. More than one IRO expressed the view that posting such letters may be one step too far. As one IRO expressed: “Where do we draw the line in publishing letters to our Board? Do we publish all of them or only the ones we like or wish to address? And there is a matter of privacy at stake.”
Certainly, the level of detail found in many proxy circulars has increased dramatically in the past few years in response to knowledge gained in engaging with shareholders and their advisors. Individual director biographies have expanded as a consequence. In future, particularly if the Dey-Kaplan guidelines are followed, we may see additional disclosures on what individual directors bring to the table in relation to their understanding/knowledge of key stakeholder groups and issues.
In addition to inviting regular engagement with public companies, the Canadian Coalition for Good Governance (CCGG) publishes a handy reference for improving proxy disclosure (see resource link below) that singles out TELUS for providing a best practice Board skills matrix. For shareholder engagement, CCGG praises Capital Power and Fortis Inc. for their proxy disclosures: “Both issuers provide details on the various methods and mechanisms that are used to foster direct and meaningful contact with shareholders and the topics that may be discussed during such communications.”
A Sea Change
Most of the responsibility for stakeholder engagement continues to land on the desks of CEOs, CFOs and IROs. This reflects the idea that the business and affairs of a corporation should be conducted by officers, managers and employees, not directors.
However, there is a sea change happening. Stakeholder advocates are pressing Boards to step up their engagement efforts and, with the help of IR teams, many are.
Where To Get More Information