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By Krystal Gaboury Berrini, Kathryn Hembree Night, Eric Sumberg, and Rob Zivnuska
CamberView Partners is a leading provider of investor-led advice to public companies on engagement and shareholder relations, activism and contested situations, sustainability and complex corporate governance matters.
Krystal Gaboury Berrini is a partner at CamberView Partners. She previously led governance research, engagement, and voting activities at Wellington Management Co. and was on the governance team at State Street Global Advisors.
Kathryn Hembree Night is a principal at CamberView Partners. She previously was an associate in the Mergers and Acquisitions Group at Goldman Sachs and an analyst in the firm’s Special Execution Group.
Eric Sumberg is a principal at CamberView Partners. He previously served as communications director for New York City Comptroller Scott M. Stringer and press secretary for New York State Comptroller Thomas P. DiNapoli.
Rob Zivnuska is a partner at CamberView Partners. He previously led investment stewardship efforts for BlackRock’s investments in the Americas and was a corporate attorney at Skadden, Arps, Slate, Meagher & Flom.
Each year, a small number of companies confront crisis-level events that draw high-profile scrutiny from a range of stakeholders. A well-executed emergency response plan can help limit the immediate fallout from a negative incident. However, in recent years, the companies that have been the most successful in managing the longer-term effects of a crisis have paid an increasing amount of attention to the viewpoints and concerns of investors. Though each situation presents a unique fact pattern, companies that have invested in building relationships with shareholders over time have been able to leverage those relationships to achieve better outcomes when a crisis hits. Here we outline the importance of relationship building, effective ways to address investor engagement during a crisis and the importance of transparency and board leadership in maintaining credibility with investors over the long term.
From an investor perspective, crisis preparation begins months or years before an event occurs. Companies that dedicate resources to building strong relationships with their investors through a robust engagement plan are taking the necessary steps to generate a reservoir of credibility and trust that can be drawn upon in the face of a difficult event. There are a few main reasons why building relationships over time is so important.
First, making contact with an investor outside of the context of a difficult situation allows companies to establish a working relationship and open dialogue. Discussions in the context of a voting issue may feel transactional for investors; seeking investor views when there is not an immediate vote at stake demonstrates the company’s genuine interest in obtaining and integrating investor feedback on important topics.
Second, tracking investor perceptions of the company’s board, compensation, and governance practices can inform the board’s discussion of potential changes and facilitate the adoption of practices that are viewed as responsive to investor concerns.
Third, understanding the nuance of how to most effectively communicate with specific individuals and teams within each organization can enable companies to more effectively interpret subtle shifts in tone or behavior during a crisis situation and ultimately spot and address investor issues in advance of a vote.
After a negative event becomes public, companies should anticipate that investor concerns will necessitate an action plan and messaging that speaks to the longer term. Companies are likely to have engagement discussions with 20 to 40 institutional investors, depending on the shareholder base. That will include large investors with a significant economic stake, as well as smaller investors who engage in governance activism and see a crisis as an opportunity to press for change on issues that may only be marginally related to the problem facing the company. Crises often create turbulence in the shareholder register: while index investors are permanent holders, active managers may be moving in and out of a stock as events unfold.
Companies that have taken time to build relationships with their investors will know instinctively in a crisis how to prioritize which investors to speak with, as well as the most effective way to approach engagement discussions. For instance, previous meetings may make clear that certain investors have been skeptical of management’s direction or the board’s oversight, while others may have been trying to deliver a message by not engaging in the past. Some investors may have the ability to quickly marshal other shareholders to run a noisy campaign against directors or executive compensation.
A company’s ability to track and operationalize this knowledge with respect to the specific investor base is invaluable in shaping market sentiment and investor opinion in the days and weeks after a crisis event and is often critical to a company’s success in getting to a good outcome in the near term.
In engagement, investors will be looking for issuers to take decisive action to address substantive issues while also being responsive to a broader set of concerns. Many questions will be asked about accountability around oversight mechanisms, whether the issues at hand are isolated or systemic and the board’s role in the lead-up to the crisis. Investors will also expect new and enhanced disclosure around engagement, feedback received, and actions taken. It is common for those who make proxy voting decisions to measure the overall responsiveness of a company to a crisis situation by taking into account not only the changes that the investor explicitly requested but also additional actions that are initiated by the company, such as developing new firmwide training or enhancing governance policies. Those companies with strong investor relationships are better positioned to get to the heart of what is required to quickly regain investor confidence and support.
In evaluating a company’s response to a challenging situation, shareholders will be focused on the role of independent directors before and after a crisis. Because investors lack visibility into what transpires in the boardroom, they depend on fulsome disclosure of processes that are indicative of independence and effective oversight. That may include enhanced disclosure of existing reporting structures, as well as new policies implemented following the event.
A crisis will often thrust the board into a significantly more public posture. Companies should ensure that a director, and preferably one in a leadership role or with oversight of the subject matter, is prepared to engage with investors and the public more broadly, including the media. Directors should also determine whether it is necessary to form an independent special committee, with independent counsel and advisers. The board may be expected to produce a report or provide other robust disclosure and share those findings with investors. Ensuring that the results of that exercise include all relevant facts and details will demonstrate to investors that the board has embraced its own responsibility for situations where oversight mechanisms proved inadequate.
As the first annual meeting after a crisis approaches, all of the proposals on the company’s ballot, from directors to compensation and any shareholder resolutions, will be subject to greater scrutiny. Having individuals at investors and proxy advisers who can attest to the good faith and responsiveness of the company is among the most powerful tools companies can deploy to achieve success at the ballot box and in coming years. That valuable resource is most readily available to those boards and management teams that have built meaningful relationships with their key investor constituencies over time.
Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.
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