Aemilia Varfis – Founder and CEO, Velos Advisory
I began working in the world of corporate governance (CG) and shareholder response two decades ago and, at that time, it was a novel concept in Europe.
Issuers were predominantly interested in securing shareholder support at their general meetings. The service involved was a processing and systemic exercise, namely working within AGM planning guidelines and shepherding a vote through the custodial chain to secure quorum at the AGM. Fast forward to now and the landscape has evolved: corporate governance is now in the spotlight. It has a voice and it is loud.
These previously minor ‘proxy voting’ teams within investors have evolved into significant investment stewardship teams, comprising of stewardship and environmental, social and governance (ESG) analysts, whose policies are now integrated in funds’ investment decision-making and play a huge role in the modus operandi of institutional investors. In this current era of corporate governance and ESG analysis, a simple integrated reporting (IR) roadshow will not cover the topics examined by investment stewardship teams, and a governance or ESG ranking will not necessarily represent the image of a corporate accurately. The onus is, therefore, on the issuers themselves to control their own message. To achieve this, companies need to focus on understanding their investors, recognise how they are viewed in the market and manage that perception by expressing their own voice.
But are investors using accurate data? Is the right ‘message’ coming across from all the CG and ESG rankings available in the market? On the flipside, are companies communicating with the right audience on matters of governance and ESG? Companies come in all shapes and sizes and from various markets and, therefore, may not have any experience in articulating their governance and ESG message correctly. In such cases, their perception or profile could be misconstrued as a result of inaccurate data.
The name of the game is engagement
One of the main focus points of the revised EU Shareholder Rights Directive (SRD II) – now in effect across Europe – was to encourage shareholder engagement. Engagement is about building relationships and trust through dialogue. It is a relationship between a corporate and an investor that is cultivated over time. In turn, this exchange of information increases efficiency, develops confidence in the corporate governance structure of a company and, ultimately, creates value for all stakeholders. Companies must embrace the power of engagement by learning how to explain their corporate governance and ESG strategy in the context of their business strategy and, in this way, enable investors to make their own decisions through clear and straightforward dialogue.
A picture may be worth a thousand words but there is an old Chinese proverb that ‘the tongue can paint what the eyes can’t see’ and this could not be more pertinent in the current environment. Targeted and constructive engagement gives companies the opportunity to paint the actual picture. So how does a company control its message?
Speak up and ‘tell your story’
If you want to win shareholder approval, tell investors who you are. Make the first move; reach out to investors proactively rather than waiting for them to come to you. Investors have a massive portfolio of companies, so, depending on your size, you may not be at the top of their agenda for engagement. If you want them to know you, make it happen.
Large blue chips may be approached directly by passive investors for strategic engagement, but when it comes to smaller companies or companies from emerging markets this is usually not the case. You may be considered a big fish in your local market, but in the eyes of a global investor you are probably a small fish in a very large ocean. It is up to you to stand out and create your own narrative.
Investors and corporates both want to see returns from engagement, so set the stage: prepare a corporate governance/ESG presentation to show the governance profile of your company and include information that you believe portrays your company in the most accurate light. Additionally, look at engagement priorities for the investors you will be meeting and link your activity and your achievements with key performance indicators (KPIs). Highlight the positive initiatives underway and how these have been incorporated into your long-term strategic goals.
During a recent governance engagement campaign, an investor explained to a client of Velos Advisory that, while they expected the company to adopt certain board practices that were outlined in its stewardship policy, they also recognised the efforts that the company had already implemented and, as a result, were willing to exhibit patience for a period of time. Had the company not engaged proactively and outlined its governance progress in detail, it would not have had the same treatment because some investors simply would not have been aware of the efforts the issuer had undergone.
Focus on constructive engagement
In the Global Stewardship Forum held by the International Corporate Governance Network (ICGN) last November, a panel of investors made an important clarification; there is a difference between a meeting and an engagement because an engagement is a two-way dialogue. There are benefits and opportunities that can result from constructive engagement, such as establishing a respectful relationship, increasing transparency and developing a rapport.
A picture may be worth a thousand words but there is an old Chinese proverb that ‘the tongue can paint what the eyes can’t see’
Engagement and dialogue have overtaken any other source of information as the optimal medium to evaluate company performance. In the 2019 Investor Survey of Morrow Sodali – in which more than 40 global institutional investors participated – when investors were asked what sources of information help them evaluate corporate purpose and culture, an overwhelming 95 per cent responded that their preferred source was regular engagement with the management and in second place – with 85 per cent – was regular engagement with the board.
Constructive engagement also needs to take place at the right time. To quote Blackrock’s CEO Larry Fink, in his 2019 letter to other CEOs: “For engagements to be productive, they cannot occur only during proxy season when the discussion is about an up-or-down vote on proxy proposals. The best outcomes come from a robust, year-round dialogue.” At Velos Advisory’s governance event (in October 2019 in collaboration with EY Greece), a large institutional investor echoed Fink’s sentiment and stated that companies should not wait until their AGMs are imminent to engage with investors.
For engagements to be effective and constructive, corporates need to engage with their investors regularly and before decisions have been finalised to have the opportunity for constructive dialogue. If you approach your investors with pre-determined decisions, then you leave them with no choice but to express their opinion through their vote at the AGM.
A two-way dialogue also works both ways; constructive engagement helps in management’s exchange of investor views with its board. I cannot count the number of times that clients have initially opposed the idea of a proactive governance and ESG-focussed engagement, but, after being persuaded to do so, they realised its value and conveyed back that the board found the investor input both insightful and useful.
Activate the right team
When engaging with investors, companies usually believe that the ‘message’ from a CIO will be different to that of a stewardship team, because the front office ‘knows the company better’ from its IR engagements. This is no longer the case; the investor message is now the same from both teams. Moreover, if engagement on governance and ESG-related matters is to be constructive, it needs to happen with the right teams and the right voices need to be heard. IR is not the voice these teams want to hear. When the panel of investors at the ICGN Global Stewardship Forum were asked who they want to engage with, one investor answered: “We prefer not to engage with IR because they are too much of a filter and are not experienced on ESG matters. If we are contacted by them, we generally do not accept engagement with them.”
Investors have repeatedly emphasised that they want direct access and dialogue with the board, whom they consider accountable. The lead independent director is therefore the main voice. When engaging with stewardship teams, it is important to create an integrated team that will allow for the dynamic two-way dialogue that is expected. If your audience is an ESG analyst or someone from investment stewardship teams, bring in your specialists that can speak the same language to convey the right message and make the engagement mutually beneficial and constructive.
Velos Advisory recently advised a southern European client to have a CG roadshow and meet the stewardship teams of its top investors – something it had not done before so that it could establish a governance rapport. The issuer team comprised of the chair of the remuneration committee, the company secretary and the general manager of IR and corporate governance (who also attended IR roadshows). The stewardship audience the latter met at this roadshow were all new faces. He had never met any of them previously and the topics of governance and ESG that were discussed had never been raised during any previous IR roadshow. Connecting the right team to the right audience makes a difference.
Control your ESG message
ESG is on the rise. It is here to stay, and it is at the top of investors’ agendas; investors are keen to see what structures are in place to support ESG oversight at board level and how they are integrated in overall business strategy. But it is also on activists’ agendas. The more institutions focus on ESG issues, the more ESG will become a lever for activists looking to engage others in their campaigns.
However, this is a rapidly evolving landscape, which has led to confusion around metrics, ratings and subsequent profiling of companies. Unlike credit ratings, ESG rating agencies primarily deal with non-financial metrics, which are not subject to universal disclosure standards. As a result, in some cases, their analysis and rankings can be deemed subjective and could convey the wrong message. It is crucial to monitor metrics being used for the vast amount of ESG rankings out there, but it is not possible to control all the information, so be selective: pick the rankings that you know your investors follow and check the accuracy of the data used by those agencies.
During a recent engagement, an investor told a Velos Advisory client that for companies of smaller sizes, ESG coverage is not as accurate as it would like it to be, so it relies on validating facts and data with the company directly before making any investment decisions. It is therefore critical that companies manage their ESG message by monitoring the information being used and correct any misinformation.
Governance v activism
The significant interplay between ESG and shareholder activism will continue to build across continental Europe and the focus is also moving to smaller companies. It is, therefore, very important to focus on the long-term investors that want to engage with you, that matter most and create relationships.
‘During times of panic and uncertainty, with the current Covid-19 crisis being a prime example, engagement should be at the top of companies’ agendas’
To gain traction, activist campaigns must generate support from the target’s wider shareholder base, and what better way to do that than by highlighting governance and ESG weaknesses? If you control your own message with long-term focussed institutional investors, which are increasingly advocating for further dialogue, you are able to reach beyond the noise an activist, with a small percentage of your shareholder base, may make.
Maya Angelou, the poet and civil rights activist, has said that: “Words mean more than what is set down on paper. It takes the human voice to infuse them with deeper meaning.”
Velos Advisory prides itself on the fact that it advises its clients on how to get their voice heard, regardless of their size or location, helping them transform their relationships with investors.
During times of panic and uncertainty, with the current Covid-19 crisis being a prime example, engagement should be at the top of companies’ agendas; the need for proactive engagement with global investors is more important than ever before, because fund managers are focussed on what not to sell. So, make sure your voice is heard!
About The Author:
Aemilia is part of the initial team that pioneered shareholder response advisory services in Europe. She has been instrumental in introducing cross border shareholder response, corporate governance advisory and investor engagement services across the EMEA region, specifically in Cyprus, France, Germany, Greece, Russia, Spain, Turkey and the UK.
She has over 20 years multi-disciplinary industry experience, which spans across M&A transactions, capital increases, AGMs/EGMs, shareholder activism and corporate governance advisory. She has worked on over 450 cross-border assignments across the EMEA region and has led numerous high profile M&A and shareholder response campaigns and proxy fights, successfully securing support for all her clients.
Before founding Velos Advisory, Aemilia held positions at D.F. King, ISS Corporate Solutions, Morrow-Sodali and Georgeson (UK & France). Her knowledge and track record in the industry is unparalleled.