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Feb 28, 2016

Leveraging IR to win the proxy vote of passive investors

Companies should repurpose their investor relations messaging for their proxy statement

Include a cover letter, explain executive compensation and use graphic design to help get the message across

Index funds control 20 percent of total equity mutual fund assets in the US, which makes them a powerful block of voters at proxy time. While they are passive investors, they are active voters, and that can create a dilemma for companies with a significant percentage of index fund investors. This gives rise to the frequent question: how can we influence these passive investors that are essentially immune to IR communications efforts yet have the power to vote large blocks of our stock?

The proxy statement may be the only investor communication document passive investors will read and is therefore one of the few opportunities to communicate directly with this important audience. But according to RR Donnelley’s 2015 Investor Survey: Deconstructing proxy statements – what matters to investors, most proxies are too long, too difficult to read and, when drafted with only the SEC in mind, often do not address voters’ most fundamental questions. Below are some emerging proxy statement best practices every company should consider.

1. Remember that context matters

In a best practices proxy statement, more space is devoted to voluntary disclosure – that not mandated by the SEC – and driven by storytelling that creates a narrative and business context for the institutional proxy voter. The goal is to educate these voters, which work in a compressed timeframe of a few months at most and are governance generalists rather than portfolio managers or equity analysts. They are not likely to know much about a company and, in the absence of clear and compelling information provided by the company, they will vote as recommended by ISS or another proxy advisory firm.

A critical question a proxy statement must answer is: how do these proposed initiatives support the company’s growth and value creation strategy? Companies should repurpose their investor relations messaging for their proxy statement.

2. Include a cover letter to highlight the most important information

Many companies are including cover letters to deliver a strong opening to the proxy statement, and also as a forum to address issues such as board accountability, investor engagement and transparency. The cover letter is an opportunity for a newly public company to establish its identity and corporate objectives, for a business in transition to lay out long-term initiatives and tracking metrics, or for a company facing industry headwinds to explain how factors out of its control are affecting performance and returns.

3. Seize the opportunity to establish your corporate identity

Firms should adopt the point of view that proxy voting teams probably don’t know their company well, and should establish their identity right from the start. This is especially important if a firm is relatively small and unknown, the company name is not as well known as its brands, or a company is in the midst of a strategic shift.

4. Remember that executive compensation is still the central governance issue

Context is critically important in the compensation discussion and analysis section of the proxy – especially the analysis part. Companies must do a better job of explaining how growth strategies translate into operational results, how these results relate to executive and incentive compensation, and how the compensation committee arrived at its decision.

Also, firms should be aware that on January 1, 2017, the SEC will enforce the rule that requires a public company to disclose the ratio of CEO compensation to the median compensation of employees. This disclosure will be required in 2018 proxies.

5. Put a spotlight on your board – and remember that diversity relates to more than just gender

Board composition is also a hot button and may require you to think through different ways to measure diversity. Gender and ethnicity are not the only measures: age and director tenure are important considerations because today’s boards need a continual refreshing of skills. A series of three simple pie charts delivers key information on diversity in a clear and accessible format.

6. Use graphic design as a vital tool in your proxy communications

Today’s proxy statement relies on visual design and graphics to simplify and explain complicated information and illustrate key facts such as board composition, executive compensation and peer group analysis. To describe a process, companies should put it in a timeline. To call out best practices, they can use a checklist.

Moira Conlon is CEO of Financial Profiles