Engagement Study Highlights Power Shift, Conflict Between US Corporations and Shareholders

(February 23, 2011) — According to a new study by IRRC Institute and Institutional Shareholder Services (ISS), corporations are generally twice as likely to describe engagements with institutional investors on shareholder concerns as successful, compared with investment managers or pension funds and other fund sponsors.

“Engagement often is cited as a cure-all for what ails investors and issuers,” said Jon Lukomnik, program director for the IRRC Institute, in a release. “Yet, there isn’t common definition of engagement, nor agreement on what constitutes a successful engagement. Thanks to this report, however, we now have the first metrics in place that are the baseline for understanding the quantity, topics, and impediments to engagement,” he said.

The study, titled “The State of Engagement Between US Corporations and Shareholders” is the first attempt to benchmark engagement, or the dialogue between public companies and their investors. According to the research, engagement has become a focus of regulatory changes and governance reforms during the past decade, and the fallout from the financial crisis has increased the focus on engagement.

The key findings of the study, as specified in the report, include the following:

• The level of engagement between issuers and investors is high. Approximately 87% of issuers, 70% of asset managers and 62% of asset owners reported at least one engagement in the past year.
• The level of engagement is increasing. Some 53% of asset owners, 64% of asset managers, and 50% of issuers said they are engaging more. Virtually none of the investors and only 6% of issuers responded that engagement is decreasing.
• Amongst investors, engagement is either a priority or a non-event. A bimodal, or “barbell,” distribution was evident, with 28% of asset owners and 34% of asset managers reporting engagements with more than ten companies. On the other hand, about 45% of asset owners and 43% of asset managers indicated they did not initiate any engagement activity whatsoever.
• Despite the headlines that result from high-profile conflicts between issuers and investors, the vast majority of engagements between issuers and investors are never made public. About 80% of issuers said most engagements remain private, as did 72% of asset owners and 62% of asset managers.
• Asset owners, asset investors, and issuers do not always agree on what constitutes “successful” engagement. While all three groups believed constructive dialogue on a specific issue was a success, issuers were materially more likely than investors to think that establishment of a contentious dialogue was a success. An even more dramatic difference was that about three quarters of both asset managers and asset owners defined either additional corporate disclosures and/or changes in policies as a “success” while only about a third of issuers agreed.
• Engagement is most likely to lead to concrete change by issuers in areas where shareholders are broadly in agreement, such as declassification of the board of directors or the elimination of poor pay practices, than in areas where shareholders’ views diverge, such as the need for an independent board chair.

The study was based on an online survey conducted from last March to May of 161 investment managers, pension funds and other institutional investors and 335 corporations.