As QCA member companies focus on growing their business, maintaining sound corporate governance practices and regularly engaging with shareholders are both vital in facilitating such growth. When managers hear the words ‘corporate governance’, sigh-inducing words such as ‘regulation’, ‘compliance’ and ‘best practice’ often enter the mind. At its core, however, corporate governance is not about any of these. The goal, rather, is simply for the company to make sure its shareholders are happy with what its directors are doing.
To be sure, the first step in making sure shareholders are happy with what the company is doing is for the company to take care to follow local company laws, as well as local best practice to the degree possible. These laws and best practice, which dictate everything from how boards and committees should be constructed, to how executives should be rewarded, to how companies should go about raising capital, are mostly a set of expectations that most shareholders are presumed to have of companies in general. However, every company is unique, and so the reasons why your company needs to make certain decisions may be unique, as well.
Fortunately shareholders generally appreciate that QCA companies often require more leeway in their growth phase when it comes to adherence to good governance practice. The proxy advisors who guide shareholders on which ways to vote in shareholder meetings also cut fledgling companies more slack. For instance, shareholders understand that smaller companies often have smaller, and in turn less diverse, boards. In addition, while proxy advisors normally want equity grants to executives to cause only a small amount of dilution to share value, these advisors accept greater potential dilution in the case of smaller companies, since paying executives using revenues isn’t as easy for fledgling companies.
Shareholders of growing companies nonetheless expect accountability and responsiveness. They want their company to follow governance practices that peer companies generally follow, such as those found in the QCA Corporate Governance Code, and when the company doesn’t, shareholders want to know why. Shareholders generally understand that every company’s situation is unique. However, shareholders may, understandably, want the company to explain to them why, in the company’s unique situation, certain unique decisions are in shareholders’ long-term interests. For this reason, regular engagement with shareholders is key.
Important to note, however, is that engagement flows in both directions. Demonstrating to shareholders that you listen to and understand their views and that you are addressing their concerns is important. Explaining to shareholders the rationale for your decisions, given your company’s unique situation, is important, as well. A roadshow that is well presented – and well timed (ideally long before any shareholder concerns arise), or in some cases even a phone call, can go a long way in ensuring that shareholders see the long-term benefit of specific company decisions.
In recent years, shareholders’ expectations have only increased when it comes to environmental, social and governance (ESG) matters. For instance, a recent study found that the majority of the largest U.S. companies now incorporate at least one ESG-related metric in their executives’ short- or long-term incentive plans. In addition, the world’s most influential proxy advisor, Institutional Shareholder Services (ISS), recently updated its guidelines for 2021 such that ‘ISS policies globally will explicitly note that significant risk oversight failures related to environmental and social concerns may constitute material governance failures, and as such, may trigger vote recommendations against board members’.
Fortunately, the time and effort spent on maintaining good ESG practices is not only unlikely to hinder the company’s progress, it may very well accelerate it. Indeed a 2018 study by a large investor, Federated Hermes, found that companies in the MSCI World Index that observed ‘good or improving’ governance and/or social practices saw greater total returns than those with poorer governance/social standards.
Companies law and governance codes evolve over time, and shareholder and proxy advisor expectations evolve even more frequently. Knowing well in advance of an annual meeting what concerns shareholders and proxy advisors may have, such as by using the ProxyRam online platform, can save a company a great deal of time and heartache that could otherwise result from shareholder dissent. Perhaps more importantly, such preparation can help ensure a company maintains its focus on its primary goal: long-term, sustainable success.
Article by Tony Quinn and Etan Blass of ProxyRAM