Corporate Cheat Sheet for Engaging Shareholder Activists

By Matt Stites

Corporate stakeholders are a diverse group. From consumers, suppliers and community members to civil society representatives and policymakers, each are uniquely impacted by a company’s operations and contribute to the company’s growth. The level and type of investment varies among these groups. But SRI, socially responsible investing or a focus on “Sustainable, Responsible and Impact,” is unique in its interest and influence.

An SRI investment philosophy is built on equal parts fiscal responsibility and social advocacy. Through active cause- or issue-based investment, the SRI community seeks to influence company decision-making to advance goals in specific areas of concern, collectively termed ESG (environment, social justice and corporate governance).

Engagement with such active, long-road investors presents a particular set of challenges for companies. At what point in the relationship -- and how often -- should you engage? Are these collaborative or confrontational investors? Who do they represent, and do your fiscal and operational goals align?

When done right, engaging the SRI community can lead to invaluable opportunities to assert industry leadership on key issues. These stakeholders can give companies an “around-the-curve” perspective on emerging sustainability challenges, enabling them to mitigate future conflicts with other influential stakeholders, both internal and external.

As specialists in stakeholder engagement, the Future 500 team regularly helps companies forge more effective relationships with the SRI community around a range of issues. It’s a complex space to navigate; with input from our network of SRI authorities, opinion leaders at major investment firms, and our own in-house engagement experts, we’ve compiled a “cheat sheet” companies can use to develop healthy, proactive relationships with their SRI stakeholders.

1. Think beyond the 10-Q

SRI investors often have a much broader, or at least more long-term, set of goals than those contained in a typical quarterly report. For example, Holly Testa, investment advisor representative for First Affirmative Financial Network, suggests material impact might go further down the supply chain or include social or environmental factors that a corporation might not consider.

“The SRI community focuses on ESG factor analysis as a way to mitigate portfolio risk, while identifying and profiting from better managed companies over the long term,” Testa says. As a result, the definition of ‘materiality’ might be a bit broader than what some companies are used to.

In other words, SRI investors want to ensure the companies in which they invest has made a full assessment of the long-term risks and opportunities. Addressing this need will likely lead to happier, more committed investors.

2. Don’t wait for a resolution to be filed in order to engage

One easy way to offset the cost and pressure of official shareholder inquiries is to engage on a regular, informal basis.

“Many companies ignore initial attempts by investors to communicate – for months,” says Conrad MacKerron, senior VP of corporate responsibility firm As You Sow. Even without detailed or specific answers, informal engagement demonstrates respect for investor concerns.

Conrad says frustration over non-communicative companies can cause SRIs to increase the ask, lose flexibility in negotiations, and eventually lead to the filing of a shareholder resolution. When it comes to informal engagement, companies have a lot of options -- from casual phone calls to sustainability conferences and the annual SRI conference. The key is to establish a channel through which investors feel they are being heard and their concerns addressed.

3. Come prepared

Every SRI shareholder is looking for leadership to demonstrate comprehensive knowledge and familiarity with corporate resources and sustainability commitments. It’s what led them to invest in the first place. While the documentation may take some time to uncover, it’ll be worth it to start off from an informed position to build on investor discussions. MacKerron says it’s crucial to have a toolkit of figures and best practices.

“Every CSR person should have standard sustainability benchmarks at their fingertips – GHG emissions, energy and water usage, accident rates, waste and recycling rates.”

Read up on your key issue areas-- if your SRI investors have any specific questions, detailed answers will only build confidence in your authority and ability to act.

4. Bring in the experts

In addition to thorough research, direct engagement requires a strategic mix of personnel to answer complex questions. SRI issues often call for a level of expertise that goes beyond the realm of a typical Investor Relations specialist. Issue experts in sustainability, supply chain management, engineering, HR-- whatever your topic areas-- can demonstrate the extent to which corporate and SRI values align.

MacKerron says it’s important to respect SRI expectations. Most have filed a number of resolutions in the past, and won’t be fooled by half-measures. The conversation may start in PR, but it should be escalated to experts as soon as possible.

“Funneling everything through a PR figurehead or the legal department will not be viewed as proactive engagement,” he warned.

Holly Testa agreed: “The responsible investment community is interested in not just the public face of your sustainability initiatives, but also how sustainability is integrated into the strategic and operational aspects of the company.”

In other words, be up front about the technical challenges that might arise out of SRI requests. Discussing the agenda with investors can open their eyes to the practical elements of corporate commitments, leading to solutions that are more efficient for both parties.

5. Be transparent

Shareholder outreach is often a simple request for information rather than reform in company policy or practice. These kind of low-stakes, low-effort engagement opportunities should not be ignored -- again, proactive response to these requests are far less costly and cumbersome than addressing formal shareholder resolutions.

Such opportunities for transparency include existing research, cost/benefit analysis and estimated timeline for action. And as Susan Baker, VP of shareholder advocacy at Trillium Asset Management suggests, access to personnel such as company board members upon request. Open as many channels of communication with SRIs as legally possible, but don’t use fine print as a buffer for engagement. Abusing legal forces investors into formal action, such as shareholder resolutions, to seek corporate engagement.

6. Treat shareholder resolutions as an opportunity to engage

A shareholder resolution isn’t necessarily an indictment on your corporate culture or policies. Often time these resolutions are filed with the intention of opening a channel of constructive dialogue through which a company and its active investors can address critical issues. Testa reminded companies that investors are likely already on their side when considering a resolution.

“Chances are good that the activist investor owns shares in your company because they believe you are a quality company already on a sustainable path,” she says.

MacKerron warns against restricting or shutting down engagement in response to an official shareholder resolution. SRIs are increasingly adept at using tools like social media to network with advocates and corporate campaigners, and adversarial response on the part of the company can devolve quickly into an untenable PR situation.

There is still plenty of room for positive engagement in the context of a shareholder resolution, MacKerron says.

“Proponents should be treated as part-owners in the company looking to make a good company better.”

7. Think twice before challenging a resolution

If a resolution is filed, there might be some instinct within the relations board to challenge it with the Securities and Exchange Commission. However, Testa warns, don’t be so quick to act.

“Even if you believe you have a case [with the SEC], consider the consequences,” she says.

The court process alone is an enormous drain on human and financial resources for the company and, by extension, its investors. It also sets a precedent that a company is prone to litigation over long-term shareholder engagement on important shared issues. It’s often seen as a short-term avoidance of long-term responsibility. Instead, proactive negotiation might lead to an actionable compromise that satisfies all issue stakeholders.

8. If dialogue stalls, remember your shared values

As you work through your response to a shareholder resolution, it’s crucial to remember your stakeholder engagement fundamentals. As Susan Baker points out, stalled negotiations can find new life if you establish and acknowledge overarching common interests.

Remember: SRI investors and companies often align on the end goal, despite differing views on how to get there. Reminding both sides of that shared higher-level interest can lead to creative solutions that serve both corporate and investor objectives.

9. Recognize that SRI expectations are increasing

Kellen Klein, senior manager of stakeholder engagement at Future 500, says corporations need to be aware of scaling shareholder demands.

“Corporate sustainability performance and commitments are rapidly increasing. As they do, so do investor expectations,” he says.

He urges companies to fairly assess SRI requests and resolutions before writing them off. A competitor analysis, for example, can provide invaluable industry benchmarks to determine your company’s performance in ESG issues. If the results are sub-par, SRI engagement should should prioritize even higher. These organizations can offer  guidelines and best practices to strengthen corporate commitments.

MacKerron points out that this should be standard procedure in a company’s response strategy.

“If a shareholder proposal is filed, don’t seek to withdrawal by the proponent in exchange solely for a commitment to engage,” he says. This approach precludes access to invaluable resources to both elevate corporate ESG response and mitigate risk of public scrutiny and criticism.

10. When in doubt, engage more stakeholders

When it comes to engaging SRI investors, you aren’t alone. Seek industry feedback in SRI communication and benchmark competitor responses. The lessons learned and best practices available can lend crucial insight into the investor landscape, including which groups or representatives are open to constructive dialogue.

This is where positive SRI engagement can pay off in a big way. If challenges arise with particular investors, seek feedback from positive relationships. Not only is this good investigative practice, but the relatively small SRI network means successful engagement can be leveraged to greater effect in supporting new or developing relationships. Build a good rapport with influencers within your industry, and the word-of-mouth benefit will come full circle.

The same can be said for the advocacy community. These investors are often on close terms with many NGOs and environmental thought leaders. Think of these organizations as more resources for nuance and expertise in a given issue -- successful engagement within these groups leads to greater issue authority and network support in negotiations.

Matt is the marketing and communications coordinator for Future 500, a stakeholder engagement nonprofit dedicated to finding common ground between uncommon allies, from corporate executives to environmental activists.