Skadden M&A partner Ann Beth Stebbins and her guest, Rebecca Corbin of Corbin Advisors, explore the critical role that directors play in shareholder engagement. Corbin stresses that a proactive, not merely reactive, approach toward shareholder engagement is essential for success.
Episode Summary
In this episode of the Informed Board podcast, our host, Skadden M&A partner Ann Beth Stebbins is joined by guest, Rebecca Corbin from Corbin Advisors, to explore the critical role that board directors play in shareholder engagement. Corbin stresses that a proactive approach toward shareholder engagement can enhance a company’s value.
In their conversation, Ann Beth and Rebecca discuss how a board can best stay attuned to investor sentiment, the practical actions a company can take to raise the profile of its directors, and the role of the board in spreading the culture and message of the company.
Looking at topics that investors are focused on, the episode explains that corporate culture, if communicated effectively, can give a company a competitive edge with investors. Future-readiness is another key theme, highlighting the necessity for boards to have diversified skill sets that align with the company's strategic objectives.
This episode serves as an insightful guide to the world of proactive shareholder engagement, emphasizing the role directors can play as value-enhancing ambassadors of a company.
Voiceover (00:00):
From Skadden, you are listening to The Informed Board, a podcast for directors facing the rapidly evolving challenges of a global market, a compliment to our newsletter for directors. Our aim with this podcast is to help flag potential problems that may not be fully appreciated, explain trends, share our observations, and give directors practical guidance without a lot of legal jargon. Join Skadden Partners who draw on years of frontline experience inside boardrooms to explore the complex issues facing directors today.
Ann Beth Stebbins (00:34):
It is critical that directors are aware of and receptive to investor sentiment. After all, directors are elected by shareholders to represent their interests and act as their fiduciaries. Management is the frontline in shareholder engagement, but what role does the board play? I'm Ann Beth Stebbins, a partner in the M&A group at Skadden. I'm joined today by Rebecca Corbin of Corbin Advisors. Corbin Advisors is a data-driven investor relations advisory firm that Rebecca founded in 2007. The firm has conducted over 22,000 interviews and surveys with institutional investors and analysts, and Rebecca has her finger on the pulse of investor sentiment. Rebecca is joining me today to discuss how a company can utilize directors in shareholder engagement and the value enhancing benefits to a company of an effective engagement program. Rebecca, thanks for being with us.
Rebecca Corbin (01:33):
Thanks for having me, Ann Beth. Thrilled to be here.
Ann Beth Stebbins (01:36):
Rebecca, you're out talking to investors every day. How focused are investors on board composition, board skills, and good corporate governance? What do investors care about?
Rebecca Corbin (01:49):
The investors that we are interviewing and speaking with day in and day out on behalf of our clients are institutional investors as well as the sell side analysts that cover companies. So think about the active money managers, not so much the passive or stewardship groups. They're very interested in governance. 84% of investors that we interview place importance on governance as an investment factor. We view the board as a true opportunity and for companies to really present their boards as a strength and in cases a competitive advantage for publicly traded companies who are competing for investor capital.
Ann Beth Stebbins (02:31):
Board should not think of shareholder engagement as reactive or responsive. It should be a proactive program that a company has in place, shareholder engagement as a two-way street.
Rebecca Corbin (02:44):
Absolutely. We are seeing a shift with regard to companies embracing a more proactive approach to showcasing their directors and how that is adding value to the organization. We do see it more in terms of mega and large caps, which tend to be in the spotlight. We are seeing companies demonstrating to investors that they are open and transparent about who is on their board and their skills, capabilities, and attributes and why that is supporting value creation over time.
Ann Beth Stebbins (03:20):
What are some practical actions that a board can take and to get their board members out there spreading the culture and message of the company?
Rebecca Corbin (03:28):
It starts with the first line of offense, which is our website. Ensuring that you have up-to-date helpful, educational information about your board is critical. I was just researching a company today and I typed in XYZ company board, I was taken to their website and there's no photos of their board members on the website. And so, I asked one of my colleagues, "Can you confirm that this company doesn't have any board photos?" And he did his research and he said, "Well, they do have board photos. They have them on the corporate site where their board is listed but they don't have it on their investor relations site."
(04:16):
It starts with making sure that we have photos, we have background information that educate investors on who our board is, all the way up to controlled access to board members and this can range from having them attend investor days in an ambassador capacity where they are in the audience and the CEO invites participants to engage with the directors and it also gives the board member a great window into the company and through not just the presentation but also the questions and answers that happens at investor days.
(04:52):
A large cap financial services company scheduled a non-deal road show in Boston, ESG focused, then they brought their chair. She's very knowledgeable on ESG at the bank and it was extremely well received. We do believe in open engagement. We do encourage that for our clients, but there are some factors to consider. One is that boards need to be prepared and prepped for engaging with institutional investors. Institutional investors are not friends. They are investing in companies and every single engagement that they have is a chance for them to analyze and assess and build that into their investment thesis and model. So, we want to make sure that we are putting our best foot forward, that our board is prepared and that we understand what the objectives are of that meeting and we have knowledge of questions or topics and that the board is accompanied by a member of management and the investor relations officer.
Ann Beth Stebbins (05:49):
How can a board best keep their finger on the pulse of investor sentiment?
Rebecca Corbin (05:54):
Investor relations is a massive factor in valuation. In fact, 89% of investors say that investor relations impacts valuation, so the board should be very up to speed with regard to what the company is doing. From an investor relations perspective, a large part of that is understanding investor sentiment and perception. The first defense for publicly traded companies is the investor relations function and the investor relations professional. They are engaging with investors and they should be reporting that up to the board at least on a quarterly basis in terms of what they're hearing, analyzing that, and providing overarching trends. Any good investor relations officer is going to be respected by management and the board and be able to communicate the good, the bad, and the ugly.
Ann Beth Stebbins (06:46):
So that's regular reporting to the board at each board meeting.
Rebecca Corbin (06:51):
Submitting a report, but more importantly bringing that report to life and being able to answer questions. We're learning from your investors. Some investors will be frank and direct and some investors won't, which is why we conduct perception studies on behalf of our clients based on interviews and surveys with shareholders, prospective investors, the analysts that cover the company to really underscore and identify the factors that are impacting valuation, both in terms of strengths but also weaknesses, opportunities, threats, perspective on the leadership team, perspective on investor relations and communication.
(07:28):
And this gives not only the leadership team but the board, the truth of how we are currently perceived in the market and what we can do to change that perception or address the issues that are raised. It is one of the best defenses against activism. It is being your own best activist because activists start with valuation and there's difference between what a stock is worth and what it's trading at, and they will go out to the financial community to conduct their own due diligence and if there's any type of consternation around strategy, leadership, capital allocation, the board that they're hearing from shareholders, that gives them greater confidence that they're going to be successful.
Ann Beth Stebbins (08:11):
You talked about actions that the company can take to proactively give investors controlled access to the board, things like website management and utilizing your board members as the ambassadors. When is that not enough and when will investors want face time with individual directors?
Rebecca Corbin (08:30):
It needs to be done in a methodical, thoughtful way. There has to be a plan and there has to be a process so that it is successful when there is an activist situation, that could include outreach to investor relations or the leadership team and if it's escalating, that would generally require more board engagement. Or if there are proxy issues where there's a vote on the table and it's a contentious matter, it's important that the board is available to speak with institutional investors, large shareholders, to provide context and perspective on why they should vote in favor of the company.
Ann Beth Stebbins (09:15):
Should a company consider offering large investors an annual or semi-annual meeting with one or more independent directors even if the investors aren't asking for it?
Rebecca Corbin (09:27):
Our research does indicate 57% of investors appreciate some form of board-level shareholder engagement. That could be controlled access. It also could mean direct access, but I should say that 33% say that it's not important unless there are governance concerns or if there is an issue with the leadership team that they're unable to get their point across where it could escalate to the board. But generally investors work through investor relations and the leadership team before they approach the board. If you're going to be offering proactively board access, you're going to set precedence. There is some level of discussion amongst investors, so you should be prepared that investors could talk to their colleagues and say, "I just had a meeting with the board or a board member". You have to think about it in the context of the objective that you're trying to reach. Providing that access in a controlled manner is best practice. Setting up a series of meetings with investors bringing their chair into that meeting with very large institutional investors is a means to provide a different perspective and an engagement level which investors appreciate.
Ann Beth Stebbins (10:51):
If an investor requests a meeting with one or more independent directors, what is your advice to a company as to when they should agree to that?
Rebecca Corbin (10:59):
Well, it really depends on the type of investor and why they're requesting that meeting. So let's take a benign request. So large shareholder reaches out to a board member, that board member should absolutely relay the fact that they've been contacted by a shareholder to the leadership team and investor relations. Board members should not be engaging with shareholders directly and privately because investors are looking for information and they're looking for angles. It's really important to have a united front. That way investor relations could reach out to the shareholder as a follow-up and understand what their objectives are and schedule the meeting. Generally best practices is that a member of leadership, CEO, CFO, the IR leader will be present in that meeting with the investors because the board member may not have all the answers. You would engage the management team and investor relations and you would plan and prepare for that type of meeting. There are times where board members and chairs will meet with the investors independently and that's generally when there are concerns raised about the CEO.
Ann Beth Stebbins (12:17):
How would you select as a board the right board member to attend that one-on-one meeting with an investor?
Rebecca Corbin (12:26):
You want to make sure that director is briefed so that they have an understanding of what's been said publicly, they have documentation with regard to what the issues could be, and anything that they say could be published in a letter. They have to be somebody who can deal with that type of engagement pressure and stick to the script. That is what leaders do of publicly traded companies in situations that can be very cantankerous and aggressive. So we are looking typically for directors that have some street-facing experience that are actively engaged in the company, but it's generally someone who can withstand that type of pressure. You are wanting to be open and on the offensive versus the defensive because they are shareholders, just like any other shareholder. You want to make sure that you're listening and that you are taking their feedback and their comments into consideration.
Ann Beth Stebbins (13:30):
Will investors give you insight on the agenda for the meeting? I would worry about being blindsided if I were a director.
Rebecca Corbin (13:38):
When we're dealing with any type of investor asking for a meeting with leadership and or the board, we are asking them to provide any agenda items or topics that they're interested in so that we can be well-prepared. It's not always the case that they're going to share those. That's where you as a board member need to be prepared in terms of being able to discuss different topics, which is why it's best practice to have a CEO, CFO, other director with you to support listening and also answering. It is best practice to always have a second person engaged in that conversation so that there is a witness to what was discussed.
Ann Beth Stebbins (14:25):
Are investors still focused on ESG at these meetings?
Rebecca Corbin (14:30):
There's a lot of backlash on ESG. We conduct a biennial ESG survey, which we published. Our last survey was June 2023. Part of our research is how important is ESG in investment decisions and based on our broad-based institutional investor research and corporate research, it remains a significant factor.
(14:52):
In fact, when we look back at our research that began in 2010, only 20% of institutional investors said that ESG was very important to critically important to their investment decisions, and that's 55% today. When we layer in investors that say ESG is somewhat of a factor in my investment decision, that actually is 97%. So only 3% of investors that we survey, and these are your institutional investors, asset managers, only 3% say it's not at all part of my investment decision. There's an entire investor asset class that is focused on companies that are progressive in the way they think about sustainability and ESG and especially at the board level. So it's a US issue with regard to the backlash and the politicization of ESG. We do not hear that from European investors or others around the world and even in the US I think it's really important to note that 60% of institutional investors that we survey have built dedicated departments that are focused on ESG and evaluating ESG.
(16:09):
Make no mistake about it, institutional investors are seeking alpha. They believe that ESG can be and has been proven to be a component in what gets measured gets done. They have developed within their organization proprietary methodologies based on different weightings that evaluate the entire portfolio of companies that they own on ESG and they assign a rating score. So it's a structural change in terms of how investment managers are making investment decisions. It's a simple red, yellow, green, 1, 2, 3 scoring.
(16:42):
But if you think about an institutional investor who is doing their top-down bottom-up analysis, and they've got two companies in which they can invest, one has a yellow flag and one has a green flag, all else being equal, that's going to lead them to the green flag because it's less risk, it's less internal debate to make the investment case. Whether you agree with ESG or not, there's structural change at the institutional investment level that is going to make this a critically important even more so going forward. I think one day we'll stop talking about it because it's just going to be the way that we do business. So yes, we are hearing from our clients that, more and more, they are getting questions on ESG. Five years ago, they would say, "I don't get any questions on ESG." I don't hear that anymore.
Ann Beth Stebbins (17:31):
How important is corporate culture?
Culture is one of those areas that historically companies would talk about and it would be met with dead eyes and closed ears. Today, that is very different and in our research we have companies that have been able to tangibly describe and demonstrate the value of their culture and it is now perceived as a competitive advantage. So companies that are able to convey the value of culture do see a premium in our research.
Ann Beth Stebbins (18:07):
And there certainly is a detriment for bad culture.
Rebecca Corbin (18:10):
To your point, Ann Beth, the lack thereof or the weakness associated with that can have a bigger impact on valuation.
Ann Beth Stebbins (18:26):
Let's wrap up with best practices for value enhancing engagement. What are the themes that management and the board should be highlighting when they engage with investors?
Rebecca Corbin (18:37):
There are five critical factors that we've identified per interviews and surveys with institutional investors around the world on the factors that impact valuation and irrespective of company size, company sector, where that company is in its evolution. Number one is leadership. Leadership is at the executive leadership level. It's also at the board level and it is the number one factor as to why investors invest in a company and this is why it's so important to be thinking proactively around the 12th man or woman, which is the board that has historically been behind closed doors, inaccessible.
(19:24):
We truly believe that companies can lead with the strength of their board in terms of board composition and making sure that directors have the skills and the capabilities that are supporting the company not just today but into the future. Let's say that you're a company that is in transition and you have two segments and you're shifting more to a pure play in one of those segments. Do you have that sector experience resident on your board? With the advent of technology, do you have experts on your board that are technologists? We don't want to have a board that is stacked with everybody from the same industry. Investors want to see diversity of thought and experience and make sure that those skills and capabilities are represented and communicated to investors.
Ann Beth Stebbins (20:21):
So, Rebecca, it's not just a board for today. It's a board that has to have a skill set that syncs up with the company's strategy. It's a board with the skills for tomorrow.
For investors it really is around board composition. Diversity in terms of gender is important, but they actually place diversity of thought and capabilities at a higher level. They're very focused on executive compensation that is aligned with shareholder interests, and the number one metric that we have gleaned from our research is TSR, followed by ROIC or ROCE.
Ann Beth Stebbins (25:28):
So Rebecca the two-way street, what the board can learn from investors is as important as what the investors are learning about the company.
Rebecca Corbin (25:37):
Investor sentiment matters, and if you are a board, you should [have] access to that sentiment in a methodical, [independent ] consistent manner to be able to track progress.
All publicly traded companies are competing for capital and should develop the company persona that leverages all of the available assets and resources that it has including strong board directors.
Ann Beth Stebbins (25:56):
Well, Rebecca, thank you very much. This has been incredibly insightful.
Voiceover (26:01):
Thank you for joining us for today's episode of The Informed Board. If you like what you're hearing, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Additional information about Skadden can be found at skadden.com. The Informed Board is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.
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