SHAREHOLDER ENGAGEMENT: Is an Important New Skill for Boards: Understand your shareholders' concerns and establish a productive dialogue.

• Author: Cunningham, Lawrence A.
• Position: SHAREHOLDER ENGAGEMENT

Shareholder engagement expertise is a new element directors and boards are adding to their skills matrix. Since 2010, when institutional investors began meeting with compensation committees about say-on-pay votes, shareholder/board engagement has become more frequent, and now board members are being called on to address an unlimited range of topics.

THE EVOLUTION OF SHAREHOLDER ENGAGEMENT

There was a time when investors engaged only with managers, but the say-on-pay vote made engagement with those being paid awkward. It was a natural evolution for shareholders to engage with boards. Those conversations gradually expanded to cover company practices better addressed by the board than by management, especially governance oversight.

In recent years, topics have come to include traditional matters of corporate strategy and business performance, along with various agenda items under the heading of ESG. This refers to issues concerning the environment (such as greenhouse gas emissions), society (such as workforce diversity) and governance (such as board expertise). Much outreach these days blends topics, probing how a company relates the ESG agenda to its business strategy.

Enthusiasm for engagement across diverse topics puts a premium on directors with related expertise. Expertise in this area is twofold. It starts with the process of engagement --preparing for meetings by studying a company's shareholder base and understanding what different shareholders prioritize. It encompasses the substance of the discussion -from comfortable topics of business strategy to thorny issues of public policy. Above all, the art of diplomacy is key.

STEPPING UP TO THE TASK

Based on my experience in shareholder engagement and recent consultations with a dozen others working in this area, few directors are eager to step up to this new, vast and undefined role. For one, directors historically have not been screened or chosen for skills associated with shareholder engagement. Many lack experience with capital markets or a sense of what shareholders want in terms of communication and responsiveness. In short, it's not what they signed up for. That's true of engagement on topics such as strategy and performance but especially on controversial issues like climate change and racial equity.

Moreover, in hard-fought proxy contests, activist shareholders have incentives to portray incumbents unflatteringly compared to activist nominees, discouraging incumbents from taking...