The need to dedicate resources to shareholder engagement
Some large US companies still seem to disdain the idea of shareholder engagement. That’s the obvious conclusion to draw from Bank of America’s board autonomously deciding last year to recombine the roles of chairman and CEO, in direct contradiction of the wishes of shareholders, which voted in 2009 to separate the positions. The vast majority of the company’s investors reaffirmed their original vote earlier this year.
Much of the bad blood between Bank of America and several of its largest shareholders, including pension funds such as CalPERS and CalSTERS, could have been averted if the company had reached out to some of them for input instead of going ahead with a bylaw change that restored the dual role, some observers believe. The rationale is that members of the board felt CEO Brian Moynihan deserved a promotion for guiding the company back from the brink during the financial crisis to profitability and strength. But if that were true, would it have been so inconvenient to expend a little effort making the case individually to key investors? Apparently so.
At a special shareholder meeting held on Seotember 22, 63 percent of Bank of America’s shareholders voted in favor of Moynihan’s remaining as both chair and CEO. That’s a pretty weak showing and would constitute a failed vote if it were for say on pay – being below the 70 percent threshold proxy advisory firms have deemed acceptable.
‘In most votes on the proxy and otherwise, we’re used to 95 percent-plus support,’ says Matt Orsagh, director of capital markets policy for CFA Institute. ‘Any time there’s something around 50, 60, or 70 percent, [it suggests] there’s something going on there.’
In this case Orsagh believes the high level of opposition centers more on the board’s method of overturning the separation of the roles than the separation issue itself. Still, there’s been a clear shift toward a separation policy over the last 10 years, he notes, during which the number of large companies that have a dual role has dropped from 75 percent of the S&P 500 index to roughly 50 percent.
The growing preference among investors for separation of roles reflects recognition of the conflict of interest created when the chairman has to oversee himself or herself as part of senior management. ‘You can manage that conflict of interest, but for investors it’s a case-by-case basis to evaluate how it’s done,’ Orsagh says. ‘Is there a strong independent lead director? Is there an imperial CEO or not? Shareowners like separation because [then] they don’t have to worry about that conflict.’
The unilateral decision to change the bylaw shows that either the board members didn’t think separation was important to investors, or they knew it was important and didn’t care because they figured they’d win anyway, Orsagh adds. ‘I don’t think either of these is good for the board and [its] relationship with shareowners, so I think the board is going to have to do a bit of fence-mending with that 40 percent [of shareholders],’ he says. ‘Materially, it won’t affect how Bank of America is run, but it’s a fight the board picked that didn’t have to be picked.’
Orsagh sees a lesson in this for all companies: consult and engage with your investors. ‘They may disagree with you, but they’re going to appreciate that you reached out and talked to them,’ he points out. ‘And they can’t say that you did [something] behind closed doors without consulting [them].’
The leaders at one S&P 500 company told Orsagh they appointed someone whose job is to meet with the top 100 shareholders to know what their concerns are and to make sure the board knows. ‘That’s fantastic,’ he says. ‘Not every company can do that and there are resources you have to dedicate to it, but it’s done so there are no surprises.’
A survey on engagement by ISS and the Investor Responsibility Research Center Institute more than a year ago shows divergent views on engagement. Investors generally see it as something ongoing, while a lot of companies think it can be as short as one phone call or a specific week or month, Orsagh recalls. Although that can be seen as evidence that it’s a bit tactical for some firms, Orsagh says he doesn’t care what the motivation behind it is as long as there’s more communication between companies and their shareholders.