If the ‘engagement’ appears to come from the research and integration end of the spectrum, companies should respond to it in the same way as they do to all other research requests:
- Prioritise according to investor importance
- Respond, where possible, as part of the company’s regular programme of SRI communications
If the ‘engagement’ appears to come from the ‘activist’ end of the spectrum or from small shareholders, companies will be more tempted:
- to ignore it,
- to engage and challenge it
- to confront it.
Most companies will be nervous of ignoring requests that may impact upon their share price (even if such impacts are illusory).
Engage and challenge
‘Engage and challenge’ is a technique that helps companies manage ‘engagement overload’ by campaigning SRI analysts. Although, it can be used in all dialogue with all SRI analysts, it is primarily designed to reduce campaigning engagements that have little investment relevance.
‘Engage and challenge’ is typically conducted as follows:
- Upon receipt of a letter from an investor or coalition of investors, companies should respond indicating that they will make time for a conference call with analysts from ALL OF THE SIGNATORIES. They should not be prepared to speak to a single ‘representative’. (If an asset manager or owner is prepared to put their name to a letter, they should be prepared to put a representative on the phone for half an hour to hear the answer).
- The company should host the call and explain openly the company’s position on the issue.
- On the call the company should ask the analysts to explain exactly how the proposed action will affect the likely direction of the company’s stock price. They should not settle for vague references to “reputational risk” but instead expect analysts to define what impact the action that they are demanding will have on revenues, costs, margin, asset values etc.
Confront it (the nuclear option)
If, after dialogue has occurred, the company believes that the investors’ demands are unreasonable and insufficiently connected to value creation, they can call the investor’s bluff and suggest to them that if they don’t like what the company is doing, they should bring a resolution to the AGM or sell the company’s shares.
Before doing this, a company would be advised to take advice from two independent sources:
- A financial analyst
- A specialist sustainability consultant
