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Apr 15, 2014

Shareholder engagement rising sharply

Financial crisis, scandal and regulation spur greater contact between companies and investors, study shows

Engagement between investors and US listed companies is at a record high, driven by a combination of regulation, investor caution in the wake of the financial crisis and companies’ eagerness to avoid failed votes, according to a study by proxy firm ISS and the Investor Responsibility Research Center Institute.

The portion of companies reporting more than 10 engagements with investors rose last year to 47 percent from 30 percent in 2011, when the investor engagement research was first carried out. At the same time, the number of institutional investors reporting more than 10 engagements increased to 55 percent from 31 percent, according to the study.

Only 22 percent of companies and 19 percent of investors had no engagements last year, a fall from 27 percent of companies and 44 percent of investors in the survey three years ago. About 67 percent of investors and 60 percent of issuers say engagement has increased ether ‘somewhat’ or ‘significantly’ in the past three years.

‘Investors, having suffered the effects of the financial crisis and having observed a decade’s worth of corporate scandals – including accounting fraud, the backdating of stock options and numerous varieties of mortgage-related malfeasance – are more sensitive to risk and less inclined to simply trust corporate boards,’ the study notes.

Companies have increased engagement partly in response to investors’ increased interest but also ‘to be proactive about telling their own stories to shareholders, so as to garner support for company strategies and blunt the appeal of activist campaigns,’ say the study authors.

The single biggest factor in increased engagement is the new requirement that US companies seek investor approval for executive compensation policies: the number of investors reporting engaging proactively on the issue rose to 70 percent from 48 percent. Companies, meanwhile, are most likely to engage investors on financial issues, with 53 percent saying they actively sought engagement on the issue. That figure is down from 59 percent in the 2011 study, however, likely due to improved corporate financials, the study authors write.

The trend toward increased engagement will likely continue in coming years amid shareholder activism, regulatory action, an uncertain economic climate and other issues, the study authors add.

‘Evidence suggests the upward trend will continue,’ says Marc Goldstein, study author and head of engagement at ISS, in a press release. `Dialogue will continue to play prominently as investors seek to mitigate risks at companies they intend to hold for the long term, while issuers seek to win support for company proposals, ward off activists and keep shareholders happily invested in the stock.’

The study was carried out between September and December 2013 and is based on responses from 133 US-listed companies with a combined market capitalization of more than $2.3 tn and 82 institutional investors with a combined total of $17 tn in assets under management.