Thank you, Jeff, for that kind introduction.

I am honored to be with you here in Chicago at the Society’s 69th National Conference. Over the years, the Society has consistently provided thoughtful comments to the Division of Corporation Finance and the Commission on a wide variety of issues and proposed rules. You understand the complexities that can affect multiple parties and recognize the importance of the interests of shareholders. All of you play a critical role in corporate governance. It is the decisions you make, the practical solutions you advance and the views you share with your boards that can, in large part, dictate the relationship between shareholders and companies.

Because of your central roles in your companies, many of the Commission’s initiatives are of interest to you: our disclosure effectiveness review; the audit committee disclosures concept release the staff is working on; and any number of our rulemakings. My hope is that you will see near-term activity in these and other areas, including rules mandated by the Dodd-Frank Act, such as the clawbacks rule as required by Section 954, the pay ratio rule under Section 953(b) and the joint rulemaking on incentive compensation as required by Section 956. So stay tuned for those developments.

But today my focus is on a selection of proxy-related issues, another area of particular interest to you. And my overall theme complements the theme of your conference, “Connect, Communicate, Collaborate.” Be proactive in building meaningful communication and engagement with your shareholders.

It was the corporate version of Mayweather vs. Pacquiao—DuPont CEO Ellen Kullman battling activist investor Nelson Peltz in a high-profile proxy fight over whose slate of directors should be elected to DuPont’s board. And like the injured Pacquiao, it turned out that Peltz was going into the fight with a major handicap to which most of the public was oblivious.

While Kullman and Peltz spent months campaigning for their candidates, the real muscle in this recent bout belonged to three companies that the media largely ignored: BlackRock, Vanguard Group, and State Street, the asset-¬management firms that were DuPont’s largest shareholders by far. Though Peltz’s Trian Fund Management owned a substantial stake in DuPont—24 million shares—it was dwarfed by the three big institutions’ combined holdings: about 150 million shares owned on behalf of investors in their funds. On the morning of DuPont’s annual meeting in May, Kullman and Peltz got word that the giants were voting all their shares for Kullman’s slate, sealing the outcome of a closely fought contest. Kullman won, but BlackRock, Vanguard, and State Street provided the victory.

It’s a sign of changing times. High-profile activists like Peltz, Carl Icahn, David Einhorn, and Bill Ackman have shaken the giants of the Fortune 500 over the past 18 months. Icahn increased the market capitalization of the world’s most valuable company, Apple, just by sending two tweets. But such headline-grabbing successes may have marked the apogee of their influence. The new reality is that the activists are not today’s true power players in corporate America. The biggest companies are increasingly influenced by a new set of bosses—small in number, working mostly behind the scenes, and becoming more activist by the day. Together they’re creating a new order for large corporations and even changing the way the capitalist system operates. They’re the biggest of the big institutional investors, the largest asset managers.

The ISS Report on the DuPont-Trian proxy contest calls attention to a number of important insights into ISS policies and practices and those of many of its institutional investor clients. Concomitantly, these policies illustrate the realities of the sharp increase in activist activity and the steps corporations can, and should, take to deal with the activist phenomena.

ISS and major institutional investors will be responsive to and support well-presented attacks on business strategy and operations by activist hedge funds on generally well managed major corporations, even those with an outstanding CEO and board of directors.

Trian Fund Management and its founder, Nelson Peltz, have clearly established credibility and acceptability. So too other well regarded funds like ValueAct. They have become respected members of the financial community.

An activist who attempts to work behind the scenes with a corporation to advise and achieve changes will have more credibility than one who surfaces with an attack.

In most cases a corporation will be well advised to meet with the activist and discuss the activist’s criticisms and proposals, which are frequently presented in the form of a well-researched whitepaper. If the activist’s recommendations are not unreasonable, careful consideration should be given to adopting some or all, thereby avoiding a public dispute. In situations where the activist seeks board representation to pursue its objectives, depending on the circumstances it may be the best course of action to consider agreeing to board representation on condition of an appropriate standstill agreement.

Major institutional investors like BlackRock and Vanguard want direct contact with the independent directors of corporations. Waiting to establish investor-director contact until under an activist attack is too late. Meaningful director evaluation has also become a key objective of institutional investors and a corporation is well advised to have it and talk to its investors about it. Regular board renewal and refreshment can be important evidence that meaningful director evaluation is occurring. In the DuPont situation, ISS did not accept DuPont’s argument that the addition of two “super star” directors to its board, after the attack started, obviated any reason to add Mr. Peltz and one of his nominees.

One of 2014’s biggest corporate governance stories was the seemingly inexorable rise in board-shareholder engagement with real-time, two-way interaction between public company board members and institutional investor representatives.

This article examines that story and assesses the underlying drivers that suggest growth will continue over the next decade.

2014: the year of engagement

In 2014, a number of regulators, standards setters and private coalitions in major capital markets took action to support such engagement. In brief:

•United States: In February, the Shareholder-Director Exchange (SDX), a working group comprising leading independent directors and representatives from large and influential US public companies and institutional investors, released the SDX Protocol. This offered guidance to boards and shareholders of US public companies about when board-shareholder engagement is appropriate and how to make the interactions more effective. Later in the year, institutional investors in the SDX working group sent a letter to Russell 1000 companies in the United States, endorsing the SDX Protocol.

In March, as part of a project on investor engagement, the Conference Board Governance Center released its own recommendations regarding board-shareholder engagement. Polls from the second half of 2014 suggest that more board members are communicating directly with institutional investors. PwC reported that 66 per cent of boards of US public companies communicated directly with institutional investors, compared to 61 per cent the prior year.

Editor’s Note: The following post comes to us from Ernst & Young LLP, and is based on a publication by the EY Center for Board Matters.

The recent surge in shareholder activism continues to keep boards on alert heading into the 2015 proxy season. Some companies are taking proactive measures to prepare for potential activist investor campaigns, including engaging long-term institutional investors.

Based on what we’re hearing from long-term institutional investors, these efforts are worthwhile in that they foster constructive relationships and alignment with key shareholders.

The EY Center for Board Matters (the Center) recently had conversations with 50 institutional investors, investor associations and advisors on their corporate governance views and priorities. We also gained insights from investors, directors and other stakeholders through our proxy season dialogue dinners.

This post is the second in a series of four posts based on insights gathered from those conversations and previewing the 2015 proxy season. The first post (available here) focused upon board composition. The upcoming two will focus on proxy statement disclosures, and the shareholder proposal landscape.

In addition to the Center’s investor outreach, the report draws on our tracking of governance trends and emerging developments through the Center’s proprietary corporate governance database.

Key Findings
• When companies engage with long-term institutional investors and demonstrate responsiveness to their concerns, those same investors are better positioned to support the company in an activist situation and may prove to be the company’s strongest allies.
• Most of the investors we spoke with believe that whether activism is beneficial over the long term depends on the particular circumstances involved.
• Some investors suggested that activists are incorporating governance changes as an afterthought to appeal to long-term institutional investors—not out of a genuine commitment to enhance corporate governance.

It’s shareholder meeting season again, corporate America’s version of Groundhog Day.

This is the time of year when company directors venture out of the boardroom to encounter the investors they have a duty to serve. After the meetings are over, like so many Punxsutawney Phils, these directors scurry back to their sheltered confines for another year.

This is a bit hyperbolic, of course. But institutional investors argue that there’s a troubling lack of interaction these days between many corporate boards in the United States and their most important investors. They point to contrasting practices in Europe as evidence that it’s time for this to change.

“It’s a very different culture in the U.S.,” said Deborah Gilshan, corporate governance counsel at RPMI Railpen Investments, the sixth-largest pension fund in Britain, which has 20 billion pounds, or about $30 billion, in assets. “In the U.K., we get lots of access to the companies we invest in. In fact, I’ve often wondered why a director wouldn’t want to know directly what a thoughtful shareholder thinks.”

As Ms. Gilshan indicated, directors at European companies routinely make themselves available for investor discussions; in some countries, such meetings are required. Many directors of foreign companies even — gasp — give shareholders their private email addresses and phone numbers.

More than 75 percent of institutional investors say companies are not doing a good job of explaining why their directors are the right people for the job, according to a survey by the EY Center for Board Matters.

The lack of explanation comes at a time when investors are increasingly looking for confirmation that boards of directors have the skills and expertise needed to monitor key risks and provide strategic counsel to the company, the survey says. It also comes amid increasing pressure for proxy access by investors.

While a number of community banks are preparing for lock horns with dissident shareholders, a bank in Indiana managed to work with an activist to avoid a nasty brouhaha.

Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Jay Clayton, Mitchell S. Eitel, Joseph B. Frumkin, and Glen T. Schleyer.

It is clear that shareholder activism continues to evolve, expand and increase in influence. There is a growing emphasis, in particular by large mutual funds and other institutional investors, on shareholder engagement and shareholder-friendly governance structures that, together with the increased activity of activist hedge funds and other “strategic” activist investors, make shareholder engagement and preparedness an essential focus for public companies and their boards.

Most recently, BlackRock Inc. and the Vanguard Group, the largest and third largest U.S. asset managers with more than $7 trillion in combined assets under management, have made public statements emphasizing that they are focused on corporate governance and board engagement. Vanguard recently sent a letter to many of its portfolio companies cautioning them not to confuse Vanguard’s “predominantly passive management style” with a “passive attitude toward corporate governance.” The letter goes on to emphasize numerous corporate governance principles and to highlight in detail (as discussed further below) the importance of direct shareholder-director interactions. BlackRock recently updated its voting policies to make clear that they are more than just guides to how BlackRock votes–they represent “our expectations of boards of directors.” The new policies continue an emphasis on direct interaction between investors and directors.

These sorts of statements by large institutions are becoming more common—TIAA-CREF has sent letters to many issuers advocating the adoption of proxy access provisions, and a number of the largest institutions last year signed a letter sent to numerous companies in support of the shareholder engagement principles embodied in the Shareholder-Director Exchange (SDX) Protocol. These statements and advocacy efforts come amid continuing high level of shareholder activism at a wide range of large and small companies.

Chair Mary Jo White gave a speech at the Tulane University Law School 27th Annual Corporate Law Institute in New Orleans, Louisiana on March 19, 2015. Chair White’s speech on cutting-edge issues in M&A included a few observations on three specific areas: the current state of shareholder activism; the shareholder proposal process; and fee-shifting bylaws. The Shareholder-Director Exchange was referenced in the speech footnotes as an example of “efforts to provide services to assist in this engagement and to establish procedures and protocols for what some think engagement should look like.”

On The Current Activism Landscape:

“Activism is used to achieve a variety of outcomes: board seats or control of the board; an acquisition or spin-off of a non-core or unprofitable line of business; or a share buyback. Negotiations between an activist and a target company may take place privately, or an activist may choose to go public. An activist may also begin a campaign behind the scenes, but go public if it believes it is not being heard or making enough progress. Any of these approaches, if used in the right circumstances, can be compatible with the kind of engagement that I hope companies and shareholders can foster.

Increasingly, companies are talking to their shareholders, including so-called activist ones.[1] That, in my view, is generally a very good thing. Increased engagement is important and a growing necessity for many companies today.”

Concluding Remarks:

“Let me stop here. What I have been advocating a bit today is a more open, constructive and balanced approach between companies and their shareholders. Companies should continue toward greater engagement with their owners, and carefully listen to their views. Activists should act responsibly and according to the rules. The strategic creativity of lawyers on either side may not always best serve the public interest. Upending the traditional roles of management, boards, and shareholders should not be the objective. Companies need their management and boards focused on their “jobs” so they can deliver shareholder value and contribute to the economic growth and innovation on which our country has always depended. But resisting all change, stonewalling every overture or ignoring the views of shareholders is also not acceptable or productive. Constructive engagement should be everyone’s goal.”