Corporations generally are twice as likely to characterize engagements with institutional investors on shareholder concerns as successful vs. investment managers or pension funds and other fund sponsors, according to a study released Tuesday by the IRRC Institute and Institutional Shareholder Services.
Among corporations responding to a survey for the study, 18% believe their institutional investors' engagement efforts are “always successful” and 62% believe they are “usually successful.” Only 8% of responding pension funds and other asset owners believed their engagement efforts were “always successful” and 32% “usually successful,” while among asset managers the belief was 5% and 38%, respectively.
IRRC Institute commissioned ISS to do the study, which was based on an online survey conducted from last March to May of 161 investment managers, pension funds and other institutional investors and 335 corporations. In-depth follow-up telephone interviews were done with 21 of the investors and 22 of the corporations in August and September.
In defining engagement, the study found it means different things to different people. “While some use the term to refer to a campaign to persuade a company to change its behavior, others, particularly issuers themselves, classify routine conversations with investors about financial results as engagement as well,” the study said.
Executive compensation was cited by 51.6% of responding pension funds and other asset owners as their most frequent subject for requesting engagement. But 53.8% of asset managers and 49.3% of corporations cited financial and strategic issues as their most frequent subject for their requests for engagement.
Among responding pension funds and other asset owners, 45.2% cited financial and strategic issues as the least major subject for requesting engagement, behind 48.4% each for environmental and social issues.
Among responding asset managers and corporations, 46.2% and 23.7% respectively said executive compensation was their next most frequent issue. For asset managers, 30.8% cited social issues and 28.8% cited environmental issues, while for corporations 7% cited social issues and 6.5% cited environmental issues as subjects for engagement.
Takeover defenses, board issues and other corporate governance subjects were also topics of engagement but not broken out in the study.
“Companies shouldn't fear engagement by shareholders” when some 82% of corporate issuers report success in engagement, said Jon Lukomnik, IRRC Institute program director, said in a webinar about the findings. “The implications are positive (for companies).”
Marc Goldstein, head of research engagement for ISS and author of the 30-page study, said in the webinar, “Engagement levels are high and increasing.”
Some 53% of responding asset owners, 64% of responding asset managers, and 50% of responding corporations said they are engaging more, according to the study. Virtually none of the investors and only 6% of corporate issuers responded that engagement is decreasing.
In the year before the study, among responding corporations, 27.3% reported initiating no engagement activity and 19.4% reported having no engagement activity initiated by others.
Among responding asset owners and asset managers in the year before the study, 44.7% and 42.9%, respectively, reported initiating no engagement activity.
Mr. Goldstein said in an interview that the relatively high amount of non-engagement activity among asset owners is partly a function of outsourcing, hiring an investment manager not only to choose stocks but also to handle matters of engagement.
“So the amount of engagement directly doesn't represent the amount of engagement on their behalf,” Mr. Goldstein said in the interview.
Among asset managers, the relatively high non-engagement activity “was surprising,” Mr. Goldstein said. The reason may be because some managers don't have the resources or “are short-term traders and don't think (engagement) is worthwhile,” he said.
“You hope long-term investors and index funds would be involved in engagement,” he added.
A growing tendency of corporations and investors to engage has been fueled by several factors: the Enron Corp. debacle and other corporate scandals; the collapse of major financial services firms; a greater sensitivity to risks in portfolio companies; less willingness to trust boards to oversee management; demand for higher levels of independence and accountability in the boardroom; concern over better alignment of executive compensation with shareholder interests; and a more investor-friendly regulatory environment.
The IRRC Institute, focusing on corporate governance, social and environmental research, was founded in 2006 with financial help from ISS, which acquired the Investor Responsibility Research Center in 2005.
ISS, a unit of MSCI, provides corporate governance research and proxy-voting advisory services to pension funds and other institutional investors.