Reaching Out To Institutional Investors
Some Thoughts – And Lots Of Practical Tips – From Steven L. Brown, Director Of Corporate Governance, TIAA-CREF
For starters, Steven, will you please give us a bit of an idea about the size and scope of TIAA-CREF Corporate Governance activities?
We have equity positions in 8,000 companies around the globe, with assets under management of $451 billion. As my boss likes to say, we own about 10% of Corporate America. We vote our shares faithfully; In fact, as we speak, we’ve voted on $432 billion of them so far this year, so we’re nearly done… until 2011.
What are your thoughts in general about reaching out to investors… and especially to reaching out to TIAA-CREF?
Reaching out to investors has always been a good practice. But post Dodd-Frank it has clearly become a “best practice.” Since the end of summer many more companies have been reaching out to us than ever before.
In general, they fall into three groups: First are what I call the “Best Practice Adopters.” They get it…and they have been doing it for some time, as a matter of routine. Sometimes they may have a few new items to discuss, but generally, a brief catch up call or visit is all that’s needed.
Then, there are the “New to the Practice Folks.” Most of them are reaching out to their top ten to twenty or so holders, pretty much for the first time. I love these folks. Most of them are very sincere: “We’re new” they tend to say…”so please don’t hurt us.” We appreciate their honesty, and their openness, and we assure them that we are long-term owners, which we are, and that we want to have a long-term partnership where governance issues are concerned. Typically, we’ll spend 45 minutes to an hour with them, but we’ll gladly spend 90 minutes or more if it will help them understand the way we, and other institutional investors tend to think and act.
Then, there are what I call the “Cavemen and Women.” It’s really remarkable how many people just don’t get it. A lot of them seem to have been forced to reach out by their Boards, and that attitude comes through loud and clear. They are just not sincere about it. Many of them have service providers do most or all of the reaching out. And actually, there’s nothing wrong with this, necessarily, as long as the service providers speak intelligently…and the corporate people seem to be fully on board. But the Cave People often do themselves a lot more harm than good when they try to reach out and do it badly.
When, exactly, is the best time for a company to reach out to an investor like TIAA-CREF? And are there times or circumstances where it may NOT be advisable to reach out?
We always appreciate the reaching out when it’s not during the proxy season. We’re very strained then – voting proxies. We like it when companies where we have a fairly large position reach out to us every year. Sometimes just a simple phone call is all that’s needed by either side. I’ll always remember a fellow who called on short notice to say he was nearby and to ask if he might stop in for five minutes. We had a really nice visit. It was a major confidence builder, and we knew that if either of us ever had issues, we could call directly and get them squared away.
Naturally, we focus most on companies where we have a fairly large stake. But if there are issues at smaller companies, we absolutely want to hear from them. We always say that “everyone becomes a governance expert when things go wrong.” And that brings up your question about when not to reach out: Make sure that you and all your representatives are well prepared. As Peggy Foran always says about this, “Never put somebody out front who’s not camera ready.” But we are always perplexed that so many companies don’t reach out: If you are proactive, you always get the benefit of the doubt if a problem arises along the way.
Who are the best people, in your experience, to do the reaching out?
We like it, of course, when the Corporate Governance Officer is accompanied by the Lead Director, or Chair of the Comp-Committee, or another committee chair, depending on the issues. We have seen a big upsurge in the number of Comp-Committee Directors who want to be involved here, along with a big increase in the number of companies who bring the head of H-R or their Employee Rewards group. Increasingly, companies are bringing their IR officers, which is generally a good thing. Often, when companies come to visit, a number of our equity analysts and portfolio managers will drop in for a few minutes too. This, I think, gives all of us the biggest bang for the buck.
What about your preferred venues? Is the telephone OK with you vs. an in-person visit? How about teleconferences?
As I mentioned, we are often fine with just a quick call, when we’ve had a dialogue all along, and when there are no issues. But we do expect to have more interaction where our holdings are large. Teleconferences are OK too, but mainly, the nature of the meeting should be determined by the kinds of issues that are out there.
What about group sessions – where maybe a dozen other investors might be invited to attend, or to tune in?
This is a good question, since there has been a lot of talk lately about a “fifth call” – in addition to the quarterly earnings calls – one that would allow management to focus on governance matters. We like having our own meetings. We think we’re important, based on our size alone. We might tune in, though mostly, we’d rather not. There are issues of control…and who gets invited…We think that most companies will figure out what’s best for themselves.
Can you give us your shortlist of things NOT to do when reaching out?
First, as I mentioned earlier, don’t come unprepared and don’t put anyone up front who’s not “camera ready.” We look hard at the “soft skills”…and at the competence of the people in attendance…and at their attitude, which invariably shows through. Recently, we had a telephone meeting that was led by the company’s comp consultant. She was very good – and very articulate…but all of us were looking at each other and chuckling…and waiting for at least one director to chime in…with something… and it never happened. So while there was nothing negative about the comp-plan, or the presentation, we wondered about the directors: “Where was their pride?” It made quite an impression.
On the flip side, we withheld our vote on a comp-plan one year, because we thought the disclosure was seriously lacking, and we wrote to say so. Soon, we had a conference call with them – where the Comp-Committee Chair, the head of H-R, the General Counsel and a big crowd of lawyers were present – but the Comp-Committee Chair did all the talking. It was very impressive and it gave us a good window into the operations of the entire Board. We are pretty forgiving, by the way, and mostly very “middle of the road.” I was on the drafting side myself, so I understand how hard it can be to put positions across clearly where there are complex issues. Actually, I think that this is an area where service providers can really gain a big competitive advantage.
Not knowing “Who’s who” can leave a very bad impression. We’ve seen a fair number of cases where the IR Officer tried to be the on-the-spot Governance Officer without having the right background or preparation on the issues; Also very bad. And let’s go back to those “Cave People” again, who can leave an indelible impression, even if they don’t say a word…and do much more harm than good.
Are there any governance flash points, or things you are watching especially as we go into 2011?
Say-on-pay, for sure, although we think that most companies will get high approval numbers. The compensation world has changed a lot, and for the better over the past few years. Social and environmental issues seem to be drawing a lot more attention of late – especially if you are in an extractive industry, post B-P. But our own preferred approach on these issues is for more and better disclosure.
Any thoughts on Proxy Access? Last year, Ed Durkin of the Carpenters Union described it as “A lot of very smart people talking about a very stupid thing.” But now that it seems possible to become the law of the land, do you think that investors will say “Use it or lose it” – and decide to flex their muscles on a few test-cases each year?
We are set to file an amicus brief – in favor of proxy access – and we think there will be proxy access. And yes, we do think that some investors will flex their muscles, and go on the hunt for test cases. But it won’t be us.
What about “Vote No” campaigns against specific Directors? It seems to us that a lot of these campaigns are mostly muscle-flexing things, mainly designed to “send a message.”
We think of this as the “nuclear option” and a very serious thing. With majority voting at many companies, you absolutely must be prepared for the Director to go if you vote “no.” These campaigns should be reserved for the most egregious circumstances only.
We also expect to see outright proxy fight every year that revolve around replacing some or all of the Board members. And here, companies should always reach out to us. We want to hear from both sides, and we almost always do – unless the directors are true Cave-People, or know in advance that they’ll go down to defeat in a big way.