SECURITIES REGULATION AND IR – Guest Column

 

Shareholder engagement is a relationship building process that provides an issuer with the opportunity to communicate with and understand how it is perceived by its shareholders. Benefits of engagement include the ability for the issuer to proactively address any dissatisfaction that otherwise could escalate into activist action and to discover innovative or creative business strategies that the issuer may not have considered. Shareholders in Canada are catching on to the global trend of increased engagement and they expect issuers to engage. An issuer that fails to prepare for shareholder engagement does so at its own risk.

Today, shareholders’ interests have developed to include a range of issues beyond just an issuer’s bottom line, such as Board recruitment processes, gender diversity, executive compensation and environmental and social governance. Over the past several years, increased engagement has focused on issues involving the potential impact of technological change on an issuer, threats to cyber security and Board composition.

Historically, issuers have only engaged with shareholders through annual meetings, analyst calls or public announcements. However, shareholders today have an evolved expectation of engagement, and an issuer’s understanding of engagement may differ drastically from that of its shareholders. When determining the form of engagement, an issuer should keep in mind two considerations: the optimal strategy for the specific issuer given its particular shareholder base and its resources, and the strategies that other issuers, particularly competitors, have implemented. There is a careful balance to strike between a tailored approach that suits individual needs and a comprehensive policy that meets industry standards.

Forms of shareholder engagement include:

1. Individual in-person meetings – these types of meetings offer the best opportunity for meaningful discussion. The opportunity for a back-and-forth dialogue facilitates mutual understanding, and provides an issuer with insight into the concerns of the particular shareholder.
2. Social media – social media is an incredibly powerful tool. The ability to transmit information instantaneously and receive immediate feedback can drastically transform an issuer’s public image. Issuers appear more accountable, transparent and accessible.
3. Road shows – road shows can be a productive way to engage with a broad base of shareholders. These shareholder engagement road shows provide an opportunity for an issuer to gather information about its shareholders, to discuss issues and to solicit feedback on its policies and performance.
4. ‘Fifth call’ – the ‘fifth call’ is a relatively new form of engagement. It is a teleconference hosted by an issuer for its institutional shareholders to discuss with independent directors information disclosed in the proxy circular and other governance issues prior to the annual meeting. The key benefit to the fifth call is that it reduces costs and may be an alternative to in-person meetings where the latter are not practical.

Given the benefits of a well-designed engagement process, an issuer should look to best practices to guide it in establishing its own shareholder engagement policies.

Current best practices with respect to shareholder engagement include:

1. Establish a written policy – an issuer should adopt a written shareholder engagement policy establishing its process for shareholder engagement and disclose this policy to its shareholders.
2. Select the right participants for engagement meetings – the participants for an engagement meeting should be clearly established. There should be a distinction between topics that a Board member may discuss and topics that would be more appropriate for investor relations or management. Additionally, when engaging institutional investors, an issuer should determine the appropriate contact person at the investor company.
3. Establish the topics for the meeting – an issuer must be sensitive to its obligation to not selectively disclose undisclosed material information. Once the topic is determined, it is recommended that both parties agree in advance to a clear agenda.
4. Know your shareholders – research should be conducted prior to meeting with any shareholder to determine the salient concerns, the voting patterns and the standard policies of a particular shareholder.
5. Engage with shareholders on an ongoing basis – an issuer should reach out to shareholders outside of the proxy season in advance of any anticipated issues to establish trust and credibility.
6. Recognize that one-size does not fit all – shareholder engagement should not be applied in a strict uniform fashion. An issuer should tailor its approach to suit its shareholders. 

An issuer must also be mindful of the following issues when designing its shareholder engagement policy:

1. Compliance with Canadian securities laws and regulations – an issuer must not selectively disclose undisclosed material information under Canadian securities laws. Therefore, an issuer must ensure that it has a clear disclosure policy, that all of its representatives are aware of the policy, and that all communication is compliant with the policy.
2. Limited time and financial resources – as shareholder engagement can prevent costly issues down the line, an issuer should be proactive and allocate the necessary resources, as may be practical, for shareholder engagement.
3. Delineating clear roles for the Board and management – Board and management may have diverging views on their respective roles in the engagement process. If an issuer follows best practice and establishes the appropriate participants for engagements, Board and management concerns in this respect can be mitigated.

The demand for shareholder engagement grows each year. An issuer cannot sit by and ignore this global trend, as failure to engage when requested may jeopardize an issuer’s relationship with its shareholders. Similarly, engaging with shareholders without a clear process may put an issuer at risk of a breach of its legal obligations, a miscommunication, or an ineffective use of resources. An issuer should work with its investor relations team to develop a shareholder engagement policy or review its existing policy to ensure that it suits the issuer’s needs and the expectations of its shareholders.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written with the help of Bosa Kosoric (Associate) and Barbara Wang (Articling Student) at McCarthy Tétrault LLP in Vancouver.