The retail vote: ‘Strategic outreach is critical,’ says new Okapi Partners ESG expert

As Bruce Kistler joins Okapi Partners from ISS, where he served as an associate director for the proxy adviser, he talks to IR Magazine about the huge investor appetite for all things ESG, how Covid-19 put a spotlight on executive pay, and the surprising mistakes he still sees companies making – as well as the need for a retail-specific approach.

What are the top trends or issues companies should be focused on across ESG more broadly, and governance specifically? Are there any areas you think are under the radar for too many companies?

Interest in E&S issues has continued to accelerate, with issues like sustainability and diversity, equity and inclusion being two major priorities. It’s hard to say these issues are ‘under the radar’ for many companies anymore because the interest from the investor community is incredible.

As part of our support of shareholder engagement for clients, we’ve been facilitating E&S-focused meetings in addition to traditional governance meetings, and investors are increasingly requesting both. The appetite to hear from companies about their E&S initiatives – and also for investors to provide their perspectives on these items – is immense.

In what ways has the pandemic changed or accelerated these trends?

The pandemic and pandemic-related adjustments in executive compensation programs has fueled a resurgence of concern over executive compensation as investors show little tolerance for certain adjustments to executive compensation programs, especially long-term incentive (equity) compensation.

This focus has manifested itself in increased investor opposition to say-on-pay votes and an increased number of large-cap companies failing to garner majority support for say on pay.

While the pandemic also generated an increased number of disclosures on employee health and safety, it remains to be seen whether these are precursors for expanded disclosures on the topic in the future.

What advice can you offer corporates looking to communicate around executive pay when cutbacks and layoffs might have been necessary during the pandemic?

This may sound a bit like a non-answer, but it really does depend on the individual company. The circumstances around layoffs or cutbacks need to be viewed in context with disclosures around the actual outcomes and board actions regarding executive compensation and company performance.

Layoffs coinciding with adjustments to executive compensation programs to try to ‘offset’ the pandemic will naturally be viewed very differently from layoffs coinciding with below-target payouts in the executive compensation program. Likewise, disclosure of furloughs will be viewed very differently from layoffs.

Across these themes, what are some of the mistakes you’re surprised to still see companies making?

It surprises me to see companies taking a reactive, rather than proactive, stance with their shareholder engagement, and not understanding the importance of engaging with the stewardship and/or proxy voting teams. Having a pre-established connection with your shareholders can help ensure you understand investors’ expectations – and vice versa – and generally help everyone make better-informed decisions.

It is also important to have these relationships and lines of communication[in place] ahead of any potential issues such as say-on-pay concerns or even activist situations.

For issuers that are actively engaging with their shareholders, it’s important to ask whether they are simply checking a box or making it as valuable as possible for all parties involved.

Finally, how has the growth in retail investors over the past 18 months thrown up new issues that companies need to consider around proxy solicitation and other forms of investor communication?

The re-emergence of retail investors has created some incredible headlines. Obviously the ‘meme stock’ phenomenon garnered national attention.

We’ve also noticed some downstream impacts that increased retail ownership can have on proxy voting. For example, earlier in the summer, we saw Churchill Capital Corp IV, a special purpose acquisition company, make direct pleas to its retail owners to vote for a transaction. Despite what was viewed by many (including the vast majority of those that had cast votes) as a no-brainer, it was initially difficult to get investors to actually vote their shares. But these are issues that [companies like] Okapi Partners have been addressing for years with clients.

It is not uncommon for companies with a significant retail base to have issues with participation in the proxy voting process. Apathy creates headaches due to quorum requirements or vote thresholds expressed as a percentage of shares outstanding. Cost is also a factor with retail investor voting, so strategic outreach is critical.