Earlier this week, our local NIRI chapter hosted John Siemann of Phoenix Advisory Partners for an interesting and informative session.
In the context of changes to the proxy process arising from Dodd-Frank and other SEC actions, John talked about the growing convergence of investor relations and corporate governance.The convergence is driven by two factors: the reputation risk associated with “governance” and the overlap between the skills and relationships of the IR team and the variety of activities associated with corporate governance.
Here’s his full presentation. Below, I’ve highlighted a few specifics.
Most of the changes in the corporate governance landscape affect companies in every industry; insurance companies aren’t treated any better, or any worse.
But there’s one interesting exception. There is a Dodd-Frank requirement for all 13-F filers — a classification that includes most insurance companies — to annually disclose how they voted on say-on-pay and golden parachute matters for holdings in the portfolio. An insurance company could face reputation risk if the investment team votes proxies in a fashion out of line with the board and management’s stance on the company’s own corporate governance.
Other items of note:
- Lull was temporary — After a lull in the past year, John believes that hedge funds will be resuming their activist stance on governance issues in concert with their return to financial health. Generally, hedge funds are most interested in items that (they believe) drive board and/or management “accountability.”
- Mid-cap companies are a likely target — Many large cap companies have already adopted governance practices deemed most important by activists, e.g., majority voting. Some of the better known organizations have stated their intent to target mid-cap companies next.
- “Withhold” vote levels show vulnerability — John believes that attention will be focused on companies where withhold votes against individual directors were at or above the 20% threshold. This is useful insight for planning.
- Preliminary proxy required — Unless the SEC takes action, companies will be required to file a preliminary proxy when they include the Dodd-Frank-mandated “say on pay” proposal. That’s another useful insight for planning.
- Understanding institutional voting — John noted that only a handful of the largest institutions now give voting authority to a proxy advisory firm. At those firms, there is no standard system for making voting decisions, but the relevant individuals often are open to direct contact with management teams. A dialog can be initiated by leveraging the IR team’s relationships with the portfolio managers.
Finally, John made the common (and fact-based) observation that adoption of Notice & Access often leads to a significant decline in retail voting. And once again, I was disappointed that the only solution offered was to resume sending full packages of the annual and proxy to individual shareholders. As I have shared with clients and others, in my opinion there are a variety of more creative, more cost-effective and more audience-sensitive solutions to the low level of voting. But that’s a topic for another post.