Considering the Investor Perspective in Shareholder Engagement Efforts

By Matt Lum, Steven L. Cross


Understanding investor expectations is key to carrying out a successful outreach campaign.  In our previous blog post titled "Shareholder Outreach and the Evolving Role of Investor Stewardship" we discussed how investors’ evolving view on stewardship is changing their expectations for ongoing engagement with portfolio companies as they begin to take a more holistic view of their investments.  Given this paradigm shift, corporate executives and non-executive directors embarking on an outreach effort related to executive compensation should expect investor engagement on other topics such as company strategy, and/or environmental, social, and governance (ESG) issues.

In this second installment of our three-part blog series, we discuss the evolving focus on executive compensation, as well as areas beyond compensation that may arise during shareholder outreach.

Investors are Shifting Their Focus in Assessing Executive Compensation Programs

Investors taking a more holistic evaluation of their portfolio companies’ performance are focusing their attention on the overall effectiveness of executive pay programs.  Their priorities are moving beyond the low-hanging fruit of compensation best practices, such as introducing clawbacks and eliminating excise tax gross-ups, to higher impact and more challenging themes.

Incentive Plan Accountability - Aligning Incentive Programs with Investor Communications

Most ongoing investor relations programs focus on a few key themes related to company strategy and execution, which are typically repeated regularly during earnings calls and investor forums.  If incentive metrics are consistent with this messaging, the alignment between investor expectations and executive compensation will be more obvious to the shareholders.  In this way, investors can more directly hold managers and compensation committees accountable for results.  Such a request was delivered to one of our clients during an investor outreach effort in which one of their largest shareholders said, “You talk about these few key indicators during your earnings calls and your investor days, now go reward executives for those specific measures.”

Investors are also increasingly interested in the incentive goals related to the performance metrics.  Being prepared to discuss goal rigor and alignment with street guidance, as well as the rationale for specific adjustments to performance metrics and payouts is important in the outreach effort.

Demonstrating Pay and Performance Alignment

Investors want to know that a company’s pay programs are effectively aligning management with the investor experience.  Shareholders rely on compensation disclosures in proxy statements and published reports from proxy advisors to try to understand the relationship between pay and performance.  However, understanding the relationship between pay and performance may not always be obvious.  Being prepared to help investors understand this relationship in a straightforward way will help facilitate the shareholder communication process and demonstrate alignment. 

Growing Interest in Environmental, Social, and Governance (ESG) Issues and the Board’s Role in Strategy

A more holistic review of the factors that can influence company performance has led some investors (e.g., BlackRock, State Street, and Vanguard) to place more emphasis on ESG issues.  In a recent Equilar study of 500 companies between 2013 and 2017, the number of shareholder proposals on social and environmental topics increased by approximately 40% (from 132 to 185).[i]  These proposals included topics such as board diversity, sustainability / climate change, and board oversight of strategy.  Additionally, ISS has taken notice of the growing focus on these issues and will now include environmental and social disclosure and transparency as additional pillars under its QualityScore evaluation.

Although ESG issues have not traditionally been viewed as executive compensation matters, their growing importance to shareholders indicates that they could become higher priorities and make their way into incentive plans as metrics.  It should be noted that these issues do not currently impact say-on-pay voting but have the potential to impact the election of directors or proposals put forward by shareholders.  For example, a 2017 Georgeson report on shareholder proposals at S&P 1500 companies indicated that of the 32 proposals on executive compensation, 5 called for companies to include sustainability as a performance metric for senior executive compensation.

Board Diversity

Many large institutional investors have been encouraging their portfolio companies to build boards they consider to be more gender and racially diverse.  Their view is that companies with diverse boards will approach issues from broader perspectives, which will ultimately lead to better decisions and stronger financial results.  In 2017, State Street Global Advisors sent a letter to 600 of the nominating chairs at its portfolio companies that had no female directors.  Of those 600, it voted against 400 nominating chairs of the companies that had not undertaken significant efforts to increase board diversity after receiving the letter.

Glass Lewis has taken notice of this trend and, beginning in 2018, will evaluate board diversity when analyzing a company’s oversight structure.  In 2019, it will generally recommend votes “against” the Nominating Committee Chair of Boards that have no female board members; however, it will take into account a company’s disclosure of its diversity considerations.

Sustainability / Climate

Sustainability and climate related issues are increasingly important for investors who believe that these topics represent potential business risks for their portfolio companies.  For example, in a 2017 letter to public companies, Vanguard stated “Climate risk is an example of a slowly developing and highly uncertain risk—the kind that tests the strength of a board’s oversight and risk governance. Our evolving position on climate risk … is based on the economic bottom line for Vanguard investors. As significant long-term owners of many companies in industries vulnerable to climate risk, Vanguard investors have substantial value at stake.”  Another example of this sentiment can be seen with ExxonMobil’s shareholders.  At its 2017 annual shareholder meeting, 62.1% of shareholders supported a proposal requiring the company to file a report on its climate change policies.

Proxy advisory firms have implemented policies on this topic.  For 2018, ISS updated its policy to say that it would generally recommend a vote in favor of resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments, or on how the company identifies, measures, and manages such risk.

Board Oversight of Strategy

Another developing point of interest for some shareholders is the board’s role in the oversight of the Company’s strategy.  These shareholders want the board to be engaged in developing the company’s strategy and understand the risks associated with that strategy.  In BlackRock’s letter to the CEOs of its portfolio companies, Larry Fink stated “I want to reiterate our request, outlined in past letters, that you publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors.  This demonstrates to investors that your board is engaged with the strategic direction of the company.  When we meet with directors, we also expect them to describe the Board process for overseeing your strategy.”


Investors are taking a more holistic approach when evaluating their investments and focusing on new areas of executive compensation as well as ESG issues.  In order to be well prepared for discussions with shareholders, companies should keep a pulse on the topics of interest for their major shareholders, and structure their outreach and communications accordingly.  Our third blog post on shareholder outreach will focus on key considerations for companies looking to engage in shareholder outreach efforts.

[i] Goforth, Matthew. "The Year In Corporate Governance." C-Suite. Winter 2018: 16-19. Print.

Portrait of Matt Lum, ConsultantMatt Lum

Matt works with clients across a wide array of industries and within various stages of the business cycle. He has experience in aligning companies’ incentive plans with their long-term strategy, advising on total compensation structures, and comparing pay and performance.  Matt holds an MBA from the University of Michigan and a BA from the University of Texas.

Portrait of Steven L. Cross, Managing Director & Head of Houston OfficeSteven L. Cross
Managing Director & Head of Houston Office

For over 25 years, Steve has served as the outside advisor to the board of directors and executive management in the design and ongoing administration of executive compensation programs.  His experience covers all aspects of compensation advisory services including compensation strategy development, incentive plan design, pay-for-performance assessments, and assistance with compensation committee governance issues.