US companies are failing to speak with investors on governance. Karina Litvack, head of governance and sustainable investment at F&C, has a solution.
It's time for US companies to step up their investor communications on governance issues. In the light of recent trends to strengthen shareholder rights in the US, including revised SEC rules adopted in 2010 and the passage of the Dodd-Frank Act, the corporate governance responsibilities of both issuers and owners have materially increased.
As the proxy season in the US gears up in advance of this year's annual meetings, issuers and investors are feeling their respective ways through a new voting environment in which shareholders will be called on to vote on pay plans - and nobody knows quite how this will play out.
To make the process more open and efficient, a group of 14 global investors led by F&C and RailPen and representing more than $1.8trn (€1.3bn) in assets has come up with a practical way forward: a so-called 'fifth analyst call' that companies would hold in addition to their usual quarterly outreach covering financial results.
This could consist of a call or virtual meeting between at least one board director and company investors, held between publication of the proxy statement and the AGM, to discuss key corporate governance issues as reflected on the annual proxy statement, including the additional resolutions now required by the Dodd-Frank Act.
The call could be hosted by issuers and co-chaired by the company and a 'lead investor'. The aim of the call would be for companies to explain to their institutional investors their corporate governance philosophy and strategy and provide investors with the opportunity to question and raise concerns prior to voting their shares.
It would also help to address a growing complaint by issuers about the growing influence of proxy voting agents by providing unfiltered access between directors and company shareholders. The agenda would be driven by, and confined to, the proxy statement. To this end, we would anticipate any meeting to cover the following basic governance points:
• Setting the Governance Framework and Philosophy, including the board's role in setting and evaluating execution of strategy
• Audit and/or Risk Committee Report Summary explaining annual achievements of the audit committee, including its review of internal controls and risk management
• Compensation Discussion and Analysis, including how compensation is linked to performance and the core business strategy
• Board Structure, Effectiveness and Succession Planning, including the company's approach to defining the roles and responsibilities of chairman and chief executive
• Any other items on the ballot in need of discussion, such as change of auditors, capital raising and board position on shareholder proposals
• A response to any negative recommendations expected or received from proxy advisory firms and a discussion of any additional or mitigating considerations
By coming forward with a formula that is inspired by the successful approach to shareholder engagement long established in the UK, we are inviting US companies to participate in this initiative and thereby establish a mechanism that will work for them.
Increased open communication on governance activities is in everyone's interest, and the fifth analyst call can serve as an efficient and mutually beneficial way of achieving best practice - surely an aspiration that both companies and institutional investors share in the wake of the financial crisis.
To date, Occidental Petroleum Corporation deserves plaudits for stepping forward and being the very first US company to welcome this overture, setting its call for 26 April. Following the 50% vote against the Hewlett Packard remuneration proposal last week, let us hope that others see the fifth analyst call for what it is - an opportunity to press the reset button with investors, open up the lines of communication and avoid pointless showdowns at the ballot box.
Karina Litvack is head of governance and sustainable investment at F&C.