Voting and engagement are interlinked processes used by investors and companies that relate to and influence corporate governance.
Shareholder engagement is the process of communication between shareholders and a company about their corporate policy and behaviour, as well as major corporate actions. Meanwhile, voting is the process of shareholders voting on key corporate policy and structure at annual meetings.
There are two main types of engagement: proactive and reactive. Proactive engagement occurs when corporates seek out a dialogue with investors to understand their concerns and discuss issues. Reactive engagement occurs when corporates only seek out dialogue in reaction to a critical shareholder proposal, or a controversy that presents financial and reputational risk. Historically, reactive engagement has been far more common.
Companies have not encouraged engagement in the past and have only engaged with shareholders during scheduled shareholder events such as annual shareholder meetings, or in times of crisis when performance issues arise. In such cases, this can often lead to negative relationships developing between investors and companies.
Investors with shares have the right to vote on certain matters at company shareholder meetings. This gives the investors an opportunity to influence a company’s corporate policy. Most voting occurs at the annual general meeting, however in extraordinary matters a special meeting might be called on issues that require immediate attention.
Votes might be held on issues like mergers and acquisitions, remuneration, board diversity, or climate risks, and will always address membership of the board of directors at general meetings. Investors use votes to support or oppose decisions that relate to clients’ concerns, and this increasingly involves ESG issues. Certain issues that might benefit the management might not be in the best interest of investors, meaning the act of voting can be very significant for shareholders.
Described as a ‘strategic imperative’ in a Harvard Law School publication, engagement has recently become increasingly focused on its regularity and transparency, becoming more proactive. There is a greater emphasis on communication throughout the year, rather than before key meetings or votes. Shareholders are keen to highlight concerns and ideas that relate to clients’ values as well as companies’ futures, and influence company behaviour and corporate governance.
The rise of ESG issues into the mainstream for investors has triggered this increase in consistent engagement and requesting of additional information, with an emphasis on higher quality. It has also signalled a shift towards increased board engagement. In 2019 KPMG reported that one third of more than 300 directors, senior executives and legal advisors reported more significant board engagement with shareholders over the last two to three years than in the past. This increase in director engagement means the responsibility of a company’s engagement is shared among different groups. Not only is engagement important to investors, it is also an increasing priority for companies, in order to communicate the suitable information for shareholders to understand their governance policies, performance, business objectives and risks.
The positivity, regularity, and transparency of engagements will affect shareholders’ votes. How well a company engages with shareholders most often determines how positive the outcome is of their votes. This is because more frequent and transparent engagement throughout the year makes investors more receptive and likely to support management’s policy. Increasingly throughout the engagement process, investors are expressing concerns and pressurising companies on certain ESG issues by stating that they will vote against policies at shareholder meetings if these concerns are not addressed. The way shareholders vote can determine a company’s profitability and allows them to influence the success of their investments
Ultimately, investors are looking for companies to listen to them and respond in a way that builds long-term value. The quality of these engagements therefore has a great effect upon the ways in which shareholders vote.