Effective shareholder engagement is an essential aspect. However, the effort of defining the nature and parameters of the same is a daunting task for the board of directors. The EY Center for Board Matters study revealed that 93% of Fortune 100 companies disclosed information about their shareholder engagement programs in their proxy statements for 2022. That has increased compared to 83% in the previous year.

Furthermore, while 67% of those firms reported that elected members of the board participate directly in discussions about engagement, their percentage increased dramatically compared to 51% recorded in 2020. From this point of view, it is apparent that board directors are becoming more recognizable in terms of creating strong relationships with their shareholders.

This has made the relationship between board directors and shareholders in this corporate world too convoluted and complex. First of all, it is veiled in the traditional formality of formal meetings and proxy battles. Secondly, shareholder engagement today is quite active compared to when it first started.

Shareholders now seek instant information from the board of directors relating to everything, right from financial concerns to environmental, social, and governance issues. Therefore, board directors must adapt to walking on a tightrope in balancing shareholder interests and meeting fiduciary duties with a new reality from then on.

Advantages of Shareholder Engagement

Sharing or getting involved with the shareholders may be of much benefit to the company and the board. The board of directors learns some lessons or appropriate knowledge about the performance of the firm and what matters from the fears and the views of the shareholders. Such information may be useful in making strategic decisions in the organization, thus enabling the board to see ahead of time some controversies or opportunities that may arise.

Shareholder engagement can also be seen as building trust and trustworthiness of the investor along with the company. According to National Association of Corporate Directors, in the opinion of the 93% of director, there is a constructive influence toward voting on the proxy and investment decision-making as a result of shareholder engagement.

Best Strategies for Effective Shareholder Engagement

A board director should adopt one or more of the following strategies for effectively building an engagement:

1. Clear objectives: The board of directors needs to know the agenda in very clear terms, about what is supposed to be presented to the shareholders and on very specific issues that may probably arise from the debate.
2. Stakeholder identification Stakeholders are not alike: Board directors should focus on big, long-term investors who have a lot of stake in the success of the firm. A look at EY Center for Board Matters found that private sector asset managers, including the Big Three and other mutual funds managers, were biggest of interlocutors for firms followed by hedge funds and pension funds.
3. Clear Communication: The board of directors should be able to present complicated issues in simple and direct wording. They should also provide ample time to listen to concerns of the shareholders and come out promptly to clarify any questions in a transparent manner. According to the NACD survey, 95% of directors affirm the right representatives from investors are in engagements and 92% of directors who affirm investors are adequately prepared for engagement.
4. Confidentiality: While a board needs to demand openness, keeping in view their fiduciary responsibilities and the duty of not disclosing private information so that, when asked, it could respond to pesky questions and know when not to speak or even direct the questioner to sign a non-disclosure agreement.
5. Follow-up and monitoring: Board directors need, at all times, to be in a position to respond to concerns at the engagement meeting by communicating with concerned shareholders that their issues have been dealt with fairly and adequately; follow up changes in their position or priorities. They will communicate the result of engagement and implications on company strategy or governance to the full board.

Shareholder engagement is no longer one of the discretionary activities of the board of directors. It has turned into a very important ingredient in effective corporate governance. Building a relation of trust among shareholders for meaningful dialogue, getting valuable insight, and ultimately getting the company to realize long-term value creation would be enormously good.

The new shareholder engagement sector will ensure that, on every issue, a board director is well-prepared to innovate. They must always stay a step ahead and keep the company’s and shareholders’ best interests at the top of their decision-making.