But issuers often fail to understand how proxy advisors operate and how to connect with them to secure the best outcomes.
Engaging with them effectively is vital to ensure they represent your interests fairly to institutional investors, and to help you pre-empt and rebut any negative recommendations.
Understanding how proxy advisors assess a business will help issuers better align areas such as business strategy and governance with their shareholder needs. This can help ensure shareholder meetings deliver the votes necessary to approve proposals.
Building relations with proxy advisors is particularly important given the Financial Reporting Council’s proposed upgrade to its Stewardship Code. This aims to support more transparent conversations between investment chain actors, including the main proxy advisors, who sign up to the code.
Here are eight ways issuers can develop an engagement strategy with proxy advisors to improve voting outcomes.
- Build your understanding of proxy advisors, how they operate and what they want
- Understand your goals, shareholder base and proxy advisors’ influence
- Tailor your strategy
- Treat proxy advisors as key stakeholders
- Make your public disclosures comprehensive
- Use meetings to optimise your strategy
- Pre-empt concerns
- Debrief and rebut negative recommendations
Stat:
72% of FTSE All-Share directors believe proxy advisors’ influence is excessive. - London Business School, 2023
1. Build your understanding of proxy advisors, how they operate and what they want
Proxy advisors provide their clients (usually institutional investors) with research, data intelligence and recommendations about management and shareholder resolutions submitted for voting at companies’ annual and special meetings.
Proxy advisors are autonomous and can evaluate lengthy, complex filings on corporate events – such as mergers, acquisitions, and executive remuneration – to support their clients’ research and voting decisions.
But too often, issuers don’t understand the different roles proxy advisors play and the influence they can have on their shareholder register. Developing this understanding will help you engage with them effectively.
Anne-Marie Clarke, our In-house Industry Expert at EQ, says issuers are often not clear about how much of their share capital held by institutional shareholders is influenced by proxy advisors’ commentary or recommendations. Many also don’t know how or when to reach out to proxy advisors, nor who to speak to, to ensure their agenda is fairly represented to investors.
“Companies have no influence over which shareholders use proxy advisors, which may cause frustration,” says Anne-Marie. “We want to change that narrative by supporting engagement and understanding with proxy advisors.”
2. Understand your goals, shareholder base and proxy advisors’ influence
When shareholder events are upcoming, create your proxy advisor engagement strategy alongside that for institutional investors. Keep your board and other relevant parties – such as the remuneration committee and advisors – appraised of the strategy’s outcomes.
Start by understanding which of your shareholders use proxy advisors, and the extent of their influence. For example, PLCs with large, concentrated shareholdings tend to have fewer investors using proxy advisors.
The Institute of Directors says many companies believe proxy advisors have an excessive influence on voting at AGMs and accuse investors of effectively delegating decisions to these proxy advisors. Some even admit to changing proposals purely to secure a more favourable voting outcome.
A 2023 study by the London School of Economics identified a growing influence of proxy advisors on remuneration votes, but found that shareholders do not necessarily always follow their recommendations.
For example, some shareholders (particularly foreign investors) tend to follow their proxy advisors’ recommendations, said the LSE. But in the UK, investors often have better access to information and stronger relationships with their managers, so rely less on proxy advisors’ recommendations compared to foreign investors, the university found.
Anne-Marie says your engagement level with proxy advisors also depends on your board’s risk appetite. “For example, if your board want all your resolutions to pass over 80% or 90%, proxy advisor engagement will be more important than if they’re happy with 50%,” she says.
The EQ advisory team can analyse your share register to determine which proxy advisors your shareholders use, and how much they depend on their reports and recommendations, she adds. EQ can then help you identify and formulate strategies around potentially contentious proposals.
3. Tailor your strategy
Proxy advisors engage with issuers in different ways – such as using varied timelines and processes – so you must ensure your engagement strategy works for them.
“Proxy advisors are independent agencies. There are no rules and regulations about how and when they should or could engage. EQ’s deep knowledge of proxy advisors means we can help issuers tailor their engagement to proxy advisors’ processes and timelines,” says Anne-Marie.
“Proxy advisors don’t necessarily have one generic policy for all their investor clients. Alongside benchmark policies, they can have custom policies for individual clients that prescribe how they assess a company.”
Stat:
According to the London School of Economics 2023 research, two large investor groups cluster around the recommendations of ISS and Glass Lewis in particular. These are almost all based outside the UK. - London School of Economics, 2023
4. Treat proxy advisors as key stakeholders
Ensure proxy advisors are a significant part of the stakeholder groups you communicate with. When you make information public, flag it to proxy advisors and make it easy to find on your website. It’s also useful to include proxy advisors in consultations on remuneration policy updates, for example.
“Corporates typically only come across proxy advisors when a shareholder vote is looming,” says Anne-Marie. “This is most often when proxy advisors are busy producing research and voting recommendations for an AGM.
“With many AGMs happening in April and May, it’s unsurprising that proxy advisors have limited capacity. Instead, nurture those relationships as part of your year-round investor engagement, creating more time to digest and understand information. You can also view proxy advisors’ policies any time.”
Stat:
53% of directors have paid CEOs less to avoid the risk of a ‘vote against’ recommendation from a proxy advisor. - London Business School, 2023
5. Make your public disclosures comprehensive
Issuers sometimes have fruitful private discussions with proxy advisors but fail to provide that same colour and explanation in their public disclosures. However, to ensure fairness and transparency, proxy advisors can only use public information when forming recommendations.
Make sure your public disclosures include everything you want them to know, especially when leading up to a shareholder vote.
For example, if you have material from an investor roadshow, make that publicly available for the proxy advisor community as well as your shareholders, and point proxy advisors to it.
6. Use meetings to optimise your strategy
The first measure of success in your engagement strategy is securing a meeting with the proxy advisor, then having a good dialogue and ensuring understanding at the meeting. This engagement is important, though you won’t know whether they plan to support your proposals or not, as they won’t tell you this at a meeting.
Share agendas and supporting materials before the meeting. Know who will be there, what they’re likely to ask and prepare your responses – exactly as you might prepare for an AGM. Try to understand their key interests better.
7. Pre-empt concerns
As an issuer, it takes planning to ensure desired voting outcomes. If your proposal is likely to get a negative recommendation, make sure you have a strong rationale for the proposal. Proxy advisors can include that explanation in their reports to investors to help inform voting decisions.
Advice can be critical here. “EQ uses in-depth analytics to predict proxy advisor recommendations,” says Anne-Marie. “When we review issuer proposals, our knowledge of proxy advisor policies and precedent allows us to identify where the red lines could be. This can help issuers adjust their strategy if expecting a negative recommendation. For example, you can then focus on encouraging your shareholders to vote in line with management.”
Proxy advisors' voting policies, such as how they assess a company’s resolutions, are publicly accessible. “Some issuers don’t have the time, resources or knowledge to get into those policies. We can help by assessing their disclosures against policies, any risks of negative recommendations and potential areas for rebuttal,” says Anne-Marie.
Getting advice on how you draft your original disclosures can also be helpful. “For example, if you're drafting your annual report or consulting on a remuneration policy change, we can assess what proxy advisors could recommend on the proposals before you disclose them,” says Anne-Marie.
8. Debrief and rebut negative recommendations
Use any feedback from proxy advisors to develop strategies. This can help address their concerns and secure more favourable voting outcomes.
Respond to all proxy advisor reports and highlight any areas of concern to your board. If a proxy advisor is monitoring an issue, plan with the board to either address it or accept it.
“If the proxy advisor makes a negative recommendation, review their whole report and their rationale,” says Anne-Marie. “Then rebut it. Point them to your public disclosures and emphasise why you think their concerns aren’t valid.”
Intelligence can be critical, she says. “EQ has a proactive and evolving understanding of proxy advisors’ processes and policies from engaging with them throughout the year. That, alongside our engagement with issuers and their shareholders, helps us understand that everyone wants to create sustainable long-term value. So there is lots of alignment.”
If negative recommendations remain, consider engaging with all shareholders to rebut this and explain your case. The LSE study showed that where investors do deviate from their proxy advisor’s recommendations, it can be due to having other information sources such as meetings with company directors.
Case study: Hunting PLC hires EQ for successful remuneration policy vote
Hunting PLC is UK-listed but needed a new “US-influenced” remuneration policy to help it compete for talent in the US – its largest market.
It proposed a hybrid remuneration framework, which is considered innovative in the UK but is common in the US. As the first UK-listed firm to try such a framework, it expected pushback at the company’s AGM.
Hunting engaged EQ for its expertise in shareholder register analysis and engagement. Using our internal data, we ascertained whether Hunting’s shareholders used proxy advisor research and how much it depended on these for voting decisions. We also modelled scenarios around expected proxy advisory recommendations, shareholder engagement feedback and data on how they had voted on similar proposals.
This enabled Hunting to decide which shareholders to focus early efforts on in seeking approval for the new remuneration framework, and which required further engagement with compelling explanations about why the framework would be vital to future success.
Before the AGM, one proxy advisor urged shareholders to vote down the proposals. To counter this, we helped draft a rebuttal letter to shareholders. EQ’s regular scenario modelling, vote projection insight, and collaboration with Mercer on shareholder engagement led to nearly 86% of shareholders voting in favour of the remuneration policy at Hunting’s AGM – an impressive result given this was the first UK-listed entity to propose such a package.
How EQ can help you hone your strategy and measure success
Proxy advisors can play a significant role in whether a resolution passes comfortably or not, but that influence is complex and multifaceted. Invest time and resources in understanding how they operate, and you’ll have a powerful ally.
EQ’s proxy advisor management service provides deep expertise and insights to enhance your engagement strategies. Our sophisticated analysis of voting trends allows you to see how much investors rely on proxy advisors’ recommendations. We efficiently and effectively review proxy advisor reports for data accuracy, policy application and areas open to rebuttal. All this intelligence – supported by our years of in-depth, hands-on experience – can help issuers form their strategies for maximum impact.
The infographic on this page shows EQ’s success in changing proxy advisors’ recommendations between 2021 and 2023.
If you would like any further information on how EQ Proxy Solicitation Services can support your engagement with shareholders and provide corporate governance advice, click below.