Navigating Shareholder Engagement Through Shifting Expectations [Teneo]

Shareholder engagement has come a long way from its early days as a loosely defined practice to a core component of modern corporate governance. In this episode, Doug Chia is joined by Matt Filosa, Senior Managing Director at Teneo, to trace the evolution of engagement from pre-Dodd-Frank conversations around say on pay to today’s polarized environment shaped by pro- and anti-ESG activism. 

The conversation explores how shifting political, regulatory, and social dynamics are forcing boards and investors to reassess what “successful” engagement actually means. The unintended consequences of past engagement practices, the rise of anti-ESG activism using familiar playbooks, and the growing misalignment between what companies and investors hope to get out of engagement today. The episode offers a candid look at why two-way dialogue has become more complicated, and why it remains essential.

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Transcript

EP XXX - Teneo

[00:00:00] Doug Chia: Welcome to the Public Company Series podcast, powered by OnBoard: giving boards the clarity, security, and insights they need to make better decisions and deliver lasting value. I'm your host, Doug Chia. This podcast series is designed to give corporate directors, executives, governance professionals the insights and tools they need to build boards that are agile, resilient, and prepared for the future.

[00:00:35] Doug Chia: It's based on the book Board Structure and Composition, which is part of the Public Company Series published by the New York Stock Exchange and JP Morgan. My guest for today's episode is Matt Filosa, Senior Managing Director, Governance and Sustainability at Teneo. Matt and his colleagues at Teneo, Martha Carter and Faten Alqaseer authored the [00:01:00] chapter of the book entitled The Future of Shareholder Engagement.

[00:01:04] Doug Chia: Matt, welcome to the show. 

[00:01:06] Matt Filosa: Thanks for having me, Doug. Nice to see you. 

[00:01:09] Doug Chia: So I'll set the context for today's discussion and then we'll get into this. And the context is actually best articulated by the authors of this chapter when they say the shareholder engagement strategies developed by companies and boards over the years have historically been very effective,

[00:01:27] Doug Chia: but these shareholder engagement strategies may prove less effective in the current environment where the Pro ESG and anti ESG shareholders are pressing companies to move in opposite directions. In their chapter, Matt and his colleagues go into a brief history of shareholder engagement in the US, key considerations for successful shareholder engagement strategies in 2025 and beyond, and a deep dive on how companies can best manage [00:02:00] shareholder engagement with DEI.

[00:02:03] Doug Chia: So the current challenge facing boards and their companies that we're gonna talk about on today's episode is how can boards take fresh approaches to their engagement strategies, given the crosswinds and challenging dynamics? Businesses learn to adapt to structural shifts in the economy and social norms and corporate governance,

[00:02:27] Doug Chia: in this particular case, shareholder engagement, is no different. Sometimes those shifts come along with new challenges from law and policy makers. So we'll also talk about. Some of the recent developments that may impact shareholder engagement, both today and in the long term. With that, let's dive into this. Matt,

[00:02:47] Doug Chia: let's talk about a little bit how we got here today. Shareholder engagement up until really the Dodd-Frank Act was not such a defined [00:03:00] concept. So maybe just talk about the effect of Dodd-Frank and what was going on before then. 

[00:03:08] Matt Filosa: Sure, happy to. And, and, and just for context, you know, I've been with Teneo for eight years, but prior to that I spent 15 years on the buy side at asset management doing stewardship as they call it today, proxy voting, corporate governance, etcetera.

[00:03:20] Matt Filosa: Um, so back then, you know, prior to Dodd-Frank, as you said, I, I think engagement was, was starting to become a thing. And I think the catalyst for that, as you may remember, Doug, the, the shareholder proposals asking for say on pay, which was an import from Northern European countries. And that really got companies attention.

[00:03:39] Matt Filosa: We saw at least one company, Affleck was the first one to kind of come out with, uh, involuntary adopt, say on pay, the ability to shareholders to vote on executive compensation plans. But I think I can safely say that spooked a lot of companies and and they 

[00:03:54] Doug Chia: I can confirm that. 

[00:03:55] Matt Filosa: Were, yeah, there you go. You, you lived through it, right?

[00:03:58] Doug Chia: Yeah. 

[00:03:59] Matt Filosa: And that I think [00:04:00] really started the conversations with shareholders and companies. They wanted to know what we thought of this idea as investors. And frankly, at the time, we didn't know what we thought about that idea. We had to talk to companies and think through what were the pros and cons, talk to our board, talk to our investment teams and figure it out.

[00:04:17] Matt Filosa: So that to me, was the first step of this shareholder engagement as we know it today. And then once we got, as you said, Doug, once we got Dodd-Frank and say on pay was mandated for all US companies that really went from a small scale, small discussion with some companies prior to that with large scale, big discussions with almost all of our portfolio companies.

[00:04:40] Matt Filosa: So they all wanted to know what we thought about, say on pay. And as we, as we went through the years after, say on pay, and we all figured out, you know, how should we use this new shiny tool with say on pay. And by the way, this 13DG guidance, which I know we'll get into that came out this year, that was a conversation we had as investors [00:05:00] back in 2008.

[00:05:01] Matt Filosa: What can we say to companies as investors that won't violate our 13G status? That was a real conversation we were having back then. So when this new guidance came out, I don't want to get ahead too far in this conversation, but that was a thing. So when that came out this year, I said, oh, that's reminds me of conversations we have in the past.

[00:05:20] Matt Filosa: Uh, so as engagement evolved, we kind of developed the approach, well, while we are here talking about say on pay, let's talk about all these other things that are on the table: governance issues, environmental and social issues came around as well. So really throughout the 2010s engagement became really sophisticated, uh, really robust,

[00:05:40] Matt Filosa: there was really no issue off the table from, from a governance and ESG perspective and really grew again from that small little spark of, of share good polls asking for say on pay. 

[00:05:51] Doug Chia: Yeah, I remember when this started, and just like investors were having concerns or talking about, okay. Are we constrained [00:06:00] by anything?

[00:06:01] Doug Chia: You know, how far can we go in terms of discussing things? Companies were also, uh, thinking about, well, what about Reg FD? And there were a lot of people saying, we can't engage with shareholder roofs because of Reg FD. And it's like clearly that that wasn't true. So it took a little while to figure out, and I remember each side taking this, we are in listen only mode.

[00:06:24] Doug Chia: And I was like, okay, well then who's gonna talk? We're just gonna sit there and stare at each other, like, you know, seventh graders at the, at the middle school dance? And so, in terms of your side, how did you see things kind of evolve from this confusion over, you know, who talks about what? 

[00:06:43] Matt Filosa: Yeah. I, I like your analogy too, Doug, and, and maybe I'd offer another one.

[00:06:46] Matt Filosa: I kind of thought of it as, and we weren't adversaries, companies and investors, but it's sometimes it felt that way. So it was a little like two boxers kind of circling the ring and figuring out which punch one of the other one might throw at them and how to defend it. [00:07:00] So it became a, a little bit of that.

[00:07:02] Matt Filosa: But where we kind of landed was, and this took a while, maybe a year or two of, of this, uh, practicing engagement, it, it, it became a learning tool, I hope, for both sides, definitely for us, in understanding. 'Cause I had real, personally, no real executive compensation background. I didn't know about executive compensation plans.

[00:07:22] Matt Filosa: I didn't live in the executive comp space prior to becoming this person who now represented a large institutional investor to talk to companies about compensation. And hopefully vice versa, a lot of the exec comp folks who joined calls and general counsels like yourself, Doug, maybe didn't understand how investors thought on these issues, maybe because they haven't had been transparent about it and didn't.

[00:07:44] Matt Filosa: So I, I felt like over the time these conversations were really rich in exchanging ideas and proof points of that to me were things like proxy access, where we, we can argue whether that ended up being a useful tool or not. But at the time, and I know you lived through [00:08:00] this as well, we kind of landed on a place where we both kind of agreed what's reasonable here to give shareholders the ability to nominate directors?

[00:08:07] Matt Filosa: What issues, what, what kinds of things can address company concerns and investor concerns? And that all came out, I think, through engagement. Um, so to me, over time it became a learning tool, a rich discussion, a way to exchange ideas, and hopefully, and we'll talk about this, the new, the, the new rules don't quash at least some of that because I think that's where the value lives when it comes to shareholder engagement.

[00:08:33] Matt Filosa: Learning from each other's perspectives, they'll undoubtedly be more issues that come up that will require investors and, and issuers to talk through and figure out what makes the most sense. And hopefully we'll still have this engagement framework to kind of have those rich conversations. 

[00:08:50] Doug Chia: And so, like you said, this is, was not just something invented for Dodd-Frank.

[00:08:55] Doug Chia: It, this discussion about shareholder engagement, particularly [00:09:00] around say on pay had been going on for quite some time and was kind of playing out in private ordering in the shareholder proposal process. But I mean, in general there were a lot of shareholders kind of clamoring for engagement. Talk to your shareholders, you know, talk to us, uh, don't just stonewall, but then, you know, what I saw as kind of a, you know, be careful what you ask for situation because of like, okay, now companies are willing to engage,

[00:09:29] Doug Chia: we're gonna put directors out there who little bit hesitant or more than a little bit hesitant to do it, but they'll do it, and now you have a flood of companies calling you up saying, we wanna engage, let's set up a meeting. So how did you, you know, in terms of the practices of how you handled that, what did that, you know, look like from, from your side?

[00:09:52] Matt Filosa: Yeah, that's a great question. And in the beginning it was, uh, we won't refuse an engagement of a company for two reasons [00:10:00] really. One, we thought that was fair, and two, our investment team, and we were an active shop, the two firms that I worked for were both active managers, and our investment teams had relationships with these companies on the investor relations side and the executive suite side,

[00:10:14] Matt Filosa: and we wanted to be respectful of that relationship on the proxy side as well. So we started out there, let's never refuse an engagement. That quickly became, of course, untenable. And then, and we quickly had to figure out a triage mechanism to figure out which ones we had the capability and, and, and, and we understood that we don't have time fell on deaf ears from the other side.

[00:10:37] Matt Filosa: That's not a great excuse for anybody to say. We're not, we don't have the capacity to answer your questions about how we, 

[00:10:44] Doug Chia: yeah, it was kinda 

[00:10:45] Doug Chia: like, well, you were asking for the engagement and now you're saying you can't handle it. So yeah, which one is it? 

[00:10:51] Matt Filosa: Yeah, for sure, for sure. There shouldn't be any sympathy expected from, from the investor, uh, side when they give you that excuse from the capacity issues.

[00:10:59] Matt Filosa: But, um, [00:11:00] we ended up having to triage, but we also did, um, other things to kind of help with our volume. We did later letter writing campaigns in the sense that we indicated how we voted, uh, why we voted against management and offered up an engagement on those types of issues. So we figured out other ways to engage and then beco and then it became, as you might remember, Doug as well,

[00:11:19] Matt Filosa: if you engage in season around the proxy, uh, around the AGM and we responded, no need for a call, that was generally code for we plan to vote with management. We couldn't necessarily be that transparent for all kinds of reasons, but that was generally code for we're gonna vote with management. And that might have been a sign sigh of relief for folks like you on the other side receiving an email like that, but that's when we would maybe reject an engagement request.

[00:11:44] Matt Filosa: So yes, you start off with good intentions, but end up being overwhelmed in figuring out ways to, to, again, be fair with your portfolio companies. And again, maybe as active managers, I'm, I'm sure passives are just as sensitive to the relationship piece as well. They have great folks over there, but as active as we were, [00:12:00] especially keen to that relationship because we had, uh, portfolio managers and research analysts who didn't want to, um, sully that relationship in any particular way.

[00:12:10] Doug Chia: Yeah. And you know, on the corporate side it was, you know, you would send a note saying, you know, no need for a call this year. And then we would sit there trying to interpret that and like parse the words. How does it say, was there some kind of hint, should we write back? You know? And it was like, well no, they said they don't, we don't need to call.

[00:12:28] Doug Chia: It was like, well yeah, if we don't write back, maybe they see that as like blowing them off. And so, you know, how many thank you notes, can you send back and forth? You know, other than this kind of the volume issue on the substance side, did you see any kind of unintended consequences of, you know, say on pay and this kind of deluge of shareholder engagement requests?

[00:12:56] Matt Filosa: I don't know. In the time I did Doug, um, you know, in, [00:13:00] in the moment, i'm not sure I did. But looking back on it, given what's happened this year, and, and again given, given the dynamics that have changed relatively sniffly, I know we'll talk about, um, this concept of I guess both responsiveness and this kind of tit for tat, if you do this, I'll vote for you,

[00:13:18] Matt Filosa: if you don't do that, I'm gonna vote against, it's probably affected some positive change, let's say that, but I'm not sure that's the right thing for investors and, and companies to be kind of trading back and forth. It kind of evolved where, um, the voting tool, the voting mechanism ended up being kind of the incentive for companies to meet investors where they were, because they kind of, in a way threatened a vote against management if a company didn't do this.

[00:13:45] Matt Filosa: And in some ways that makes a lot of logical sense. Um, but in other ways it kind of maybe made it more adversarial, uh, than it needed to be, and perhaps blurred the lines of 13 D and 13 G um, in some ways [00:14:00] unintendedly, again under different SEC administrations maybe they'd have a different perspective on that.

[00:14:04] Matt Filosa: And they did. That's why we were doing it. But I think that part of it exchange of if you do this, I'll vote this, and if you don't do this, I'm gonna vote against management. I'm not sure that serves, that's the best model to affect positive change. Then maybe that can be revisited by smart folks like you and others to think through how should engagement moving forward given this environment, be the most efficient for both sides.

[00:14:30] Doug Chia: Yeah. I also, you know, got yeah, frustrated and also saw some of the pitfalls of this transactional type engagement of just let's you know, yeah, just focus on this year, you know, were, whether they're gonna vote for or against, but also, you know, what I saw also led to some broader practices, particularly by the large passives where they, I guess [00:15:00] to kind of, you know, stave off some of the over overload on

[00:15:06] Doug Chia: demands for engagement, they would put out some kind of statement, this like one to many approach and they started making some statements on stuff that I don't think they would be opining on publicly in the past. So it did, I think it did have the effect of, of getting some shareholders taking stances on things like proxy access, which you know, you didn't expect before.

[00:15:32] Doug Chia: Let's talk about this anti ESG activism that is happening today and getting a lot of attention. You know, the obvious question is what's driving it? And maybe the, maybe the answer is obvious, but just want to hear from you, you know, are there some nuances going on with what's driving this? 

[00:15:55] Matt Filosa: Sure. Yeah. And, and, and now being on the other side of this coin being with, with [00:16:00] companies on this journey, it's really interesting to see the, the dynamics that they're dealing with and that I did not necessarily appreciate as an investor.

[00:16:08] Matt Filosa: These many, as we said in the chapter, polar opposite views on issues being lobbied into these companies and really challenging to figure out what exactly to do. But to answer your question, uh, more directly, pro ESG, it really had a bull run, right? Almost unopposed for, I don't know, 15 years. 

[00:16:29] Doug Chia: At least. 15 years.

[00:16:31] Doug Chia: It was, it was kind of like they, uh, the, the ESG proponents had the entire room to themselves for a long time. 

[00:16:40] Matt Filosa: Yeah, exactly. Exactly. I'm not sure, again, at the time I appreciated that fact. I thought, well, this is the zeitgeist, let's run with it. Um, but yeah, it was really a bull run, and an ESG ran unopposed.

[00:16:51] Matt Filosa: There were little rumblings here and there and challenging it, but there was no coordinated effort like the pro ESG movement. So to me, when I watched the anti [00:17:00] ESG movement emerge, they were using the exact same playbook as the pro ESGs, rightly or wrongly, depending on your perspective, on, on whether they have the right agenda or not.

[00:17:10] Matt Filosa: Um, they were using the same playbook, shareholder proposals, um, name and shame campaigns, social media, etcetera, uh, to affect their change and their, their view of positive change. And they've been relatively successful, uh, by any, any metric. Uh, the metric I don't use for success for them is the support for their shareholder proposals.

[00:17:31] Matt Filosa: I don't think that's the, uh, the, a great metric to gauge their success, uh, for a couple reasons. One, I don't, I don't think, um their low support levels is indicative of, um, investor perspective on this issue because if you look at the PRO ESG proposals, compare them to the anti ESG proposal support,

[00:17:49] Matt Filosa: they're both pretty low, relatively, and I think investors today, they can speak for themselves, but I don't think they want to vote for either one of them. So those low votes [00:18:00] to me don't indicate that anti ESG is unsuccessful. I mean, you, you can look at the list of companies who have rolled back some of these ENS commitments and, uh, they tout these lists as wins and perhaps rightly so.

[00:18:13] Matt Filosa: And we're dealing with, uh, on the company side, again, dealing with, uh, whether companies should or shouldn't, uh, based on this pressure. So just having the conversation is a win for, I think of the anti ESG folks. So to me, um, if they're mirroring the successful campaigns of the Pro ESGs, they've been, uh, successful.

[00:18:32] Matt Filosa: Uh, they now have an administration that seems to be on their side as well. Uh, this year getting into 2026 will be even more complicated for companies to deal with both pro and anti ESG issues. But, um, it, it's just interesting to see that it's, you know, finally emerged a, a competitor to the pro ESGs or, or counter to the pro ESGs that now companies have to, uh, figure out how to ingest that and, and, and, and come up with a strategy to deal with it.

[00:18:59] Doug Chia: In terms of [00:19:00] taking the playbook, which has had been established for a long time, I was like, wow, I, I'm surprised it took 'em this long to actually start taking a shareholder proposal and putting the word "not" in front of it, you know, put out a report saying why you're doing this and have a report saying why you don't do this.

[00:19:22] Doug Chia: It, it was almost like just, let's just have shareholder proposals turned on their head and file 'em that way. It's interesting that you've said that you can't label success here despite people like me making fun of the low level support, you know, in the single digits under the resubmission threshold, that most of these propo, at least the averages are, are showing.

[00:19:49] Doug Chia: But then yeah, you juxtapose that with Robbie Starbuck doing a whole PR campaign. Then that resulting in [00:20:00] some, uh, shareholder proposal success, or not success, but again, changing, he changed corporate behavior in declaring victory. And so I always thought that the investors actually don't really care. And that kind of shows at the ballot box, despite the corporate behavior and how they're affected by, uh, corporations are affected by a Robbie Starbucks.

[00:20:26] Doug Chia: But you're saying that maybe they actually do, they just don't wanna really say it out loud. 

[00:20:31] Matt Filosa: Yeah, there could, there could be a little bit of that going on for sure, given the political environment, but, but also maybe a little bit in their defense. Uh, and, and if you read what they say and, and believe it as truth.

[00:20:42] Matt Filosa: They say, well, we don't support those proposals for a couple reasons. One, they're overly prescriptive. Two, the company's already doing enough in terms of disclosure of the risks of this issue. Three, they're overreaching, they're kind of framing, uh, the proposals. Both, both not support, not supporting the anti and [00:21:00] the pro in the same kind of way.

[00:21:02] Matt Filosa: And I think what, what, what sometimes will, will confuse folks like me who are watching what they're doing is what do they do on the exact same proposal that is submitted by a different, by a pro ESG proponent versus an anti ESG proponent. Example is a separate chair-CEO proposal, which I know you know very well, Doug.

[00:21:21] Matt Filosa: We've seen a lot of anti ESG proponents submit that proposal and it's a straight proposal. 

[00:21:27] Doug Chia: Yeah. 

[00:21:28] Matt Filosa: Please separate the board chair from the CEO in the next transition. Right?

[00:21:32] Matt Filosa: It's the same exact proposal as the pro ESGs. 

[00:21:34] Doug Chia: Yeah. Same exact wording. Yeah.

[00:21:36] Matt Filosa: Exactly. But they're, their preamble is different. Right?

[00:21:38] Matt Filosa: But their, their, their ask is the same. Those proposals tend to get a little more support, right? From the anti, even though they're from a quote anti ESG proponent, because they're on an issue that a lot of investors, at least some investors, particularly European investors, agree with. Uh, and then you, you're stuck with the proxy advisors to figure out how can, how will they opine on that proposal?

[00:21:59] Matt Filosa: 'cause [00:22:00] I think the, the gut, the gut reaction is we, we don't wanna agree with the anti ESGs on anything. 

[00:22:05] Doug Chia: Yeah, yeah. 

[00:22:06] Matt Filosa: But I think they're putting investors and proxy advise in a place where they were forcing them to admit it, that you're not supporting this proposal just because of who the proponent is, which is partially their point.

[00:22:17] Matt Filosa: So to me, that's just an, it's such an interesting strategy for them. I don't know if it's intentional, my read it, is that it is. 

[00:22:22] Doug Chia: Oh, it's intentional. 

[00:22:24] Matt Filosa: Yeah, yeah, yeah. 

[00:22:24] Doug Chia: Let's make the investors squirm a little bit before they actually hit the button. And yeah. We've seen, uh, investors take different approaches.

[00:22:32] Doug Chia: Some are just saying, you know, Hey, an issue is an issue. We're gonna vote consistently. Others say. You know what? We're actually gonna take this supporting statement into account and look at the motive, um, and look at who's doing this. And I know that's been very controversial. So let's get back to the shareholder engagement part of it.

[00:22:53] Doug Chia: In the book, you say that engagement is more of a two-way dialogue, or at least it's supposed to be. [00:23:00] And so you say, while it's still important for companies to present their ESG story, we believe that it is also critical that companies ensure that they understand the current ESG perspectives of their top investors.

[00:23:13] Doug Chia: In large part because the anti ESG movement has not only had an impact on company behavior, but also had an impact on many large institutional investors. So we're talking a little bit about that before, but what impact are you talking about on the institutional investors? 

[00:23:34] Matt Filosa: Yeah, for sure. And I, and I should say, we wrote that chapter, we picked up the pen about a year ago, and I think we submitted it, uh, close to that.

[00:23:42] Matt Filosa: And a lot has happened since then, specifically around this particular topic, two-way engagement and, uh, the SEC's 13 D and G guidance, you know, change the game as we know. Uh, so this, this was written beforehand, but I, but I think it still holds true, and then the spirit still holds true because our [00:24:00] point was, okay.

[00:24:01] Matt Filosa: We talked about this. ESG was on a tremendous bull run buoyed by the big three investors, a big, you can call them big four, big five, whatever, however you wanna slice it up. All pro, a lot of this stuff, meaning we want companies to produce more disclosure around their missions, more disclosure around their diversity, more disclosure around their governance.

[00:24:21] Matt Filosa: All that was, was relatively unopposed and most investors were backed by that. So engagement was important, but we kind of knew where they stood. With the political change in the, in the, um, attacks from the Red States AGs on these investors for, for incorporating these issues and arguing it's illegal. Um, it's a fair question to go back to investors and say, do you still want us to put out our EEO-1 report?

[00:24:46] Matt Filosa: Do you still want employee demographics? How important are greenhouse gas emissions to you today? Taking aside the California and now New York rules about mandating it, but let's, what do investors really want now given that we've kind of changed dynamics? The [00:25:00] zeitgeist has changed. Do you still want us as companies to put these things out?

[00:25:04] Matt Filosa: Is it helpful for you? We need to know that. 'cause we're not gonna just keep putting it out just to keep putting it out. But if you have now this dynamic where investors are shy to either answer, they want to be, maybe be, be more coy about whether they want that information or not, what are companies to do as they think about their disclosure strategies, both in the proxy statements, ESG reports, 10 Ks, et cetera, where they're getting all these other pressures from anti ESGs as we just talked about, to roll it back. To me, the logical question is

[00:25:34] Matt Filosa: what, what does the biggest investor in our company want us to do? Whether that's BlackRock, Vanguard, State Street, Fidelity, T. Rowe, take your pick. What would you like us to do, BlackRock? So our paper was like, well, let's re-ask the question. Let's revisit this. And then the 13 D guidance came out and we said, okay, maybe we're not gonna get the, the color that we were looking for.

[00:25:55] Matt Filosa: So that was kind of our point. We need to have this continued two-way dialogue and revisit these issues given the new [00:26:00] environment. And, and that was, that was where we were going with this. 

[00:26:03] Doug Chia: Yeah, I, I definitely, I mean, and, and I think it's still shaking out in terms of companies still asking, should we put out a report?

[00:26:11] Doug Chia: What do we call it? Do we just kind of replace ESG with stewardship or sustainability throughout? And we've seen that, like literally seen that. Um, or just don't mention kind of these, uh, forbidden words. And so, and yeah, it's kind of like, well, let's ask our investors what they think. And the investors are being very kind of squishy about it.

[00:26:34] Doug Chia: Before we were talking about, you know, what success looks like and what I've seen is that companies and shareholders have very different, uh, ideas or conceptions of what is a successful engagement. Some companies say, well, disclosure is part of shareholder engagement, and the investors are like, no, [00:27:00] it's not.

[00:27:00] Doug Chia: That's just a requirement. Engagement is an actual discussion. So give us a perspective on the investor idea of the term successful shareholder engagement. 

[00:27:14] Matt Filosa: I think the success has, has definitely changed. I think it used to be from an investor perspective, we had a, and we used to have to define this, by the way, for the UN PRI reports how many successful engagements you've had.

[00:27:27] Matt Filosa: And maybe your framing is intentional in that way. 'cause we were like, what does that even mean, a successful engagement? And that what lended to, as we talked about earlier, this transactional type engagement where I became I need to have success, meaning I need the company to change. 

[00:27:41] Doug Chia: Yeah. 

[00:27:42] Matt Filosa: So if the company goes to, to de stagger their board, and I told them in an engagement, I think you should de stagger your board, then I had a success.

[00:27:50] Matt Filosa: That's kind of how it was, for better or worse. Today, I don't think that's happening as much. I think how investors think about successful [00:28:00] engagement is really flipped. We heard from the company their perspective on an issue we're thinking long and hard about. We're able to ask a question and get our question answered on a particular issue, uh, that we're thinking long and hard about whether it be a voting issue or otherwise.

[00:28:15] Matt Filosa: It's not as much we're succeeding because we affected change, we're succeeding as an investor because we gathered a lot of information for us and a lot of intel for us to consider as part of what we have to do for a living and what we have to do on behalf of our clients. And that, I think, is frustrating for companies because it's not two way.

[00:28:33] Matt Filosa: I, as a company, didn't get as much as I could have out of it because you, you investor, again, this does not apply to all investors, this is just general impressions. Um, I as a company did not get as much out of it as I would've liked. Like, what would you like us to do? Do you want us to keep putting out these reports?

[00:28:50] Matt Filosa: And that's the success as a company. What we advise companies is we wanna get as much we wanna tell our story. Number one, that's success. But number two is we want to get their [00:29:00] story so we can bake it into our analysis. The board can consider it as part of what they do next. So to me, the successes are now misaligned a bit, uh, given the dynamic we're in.

[00:29:09] Doug Chia: Yeah, 

[00:29:10] Doug Chia: that's really fascinating because, you know, back when I was kind of, you know, directly active in these kind of engagements, you come back to the office and was the engagement successful? And it's like, well, yeah, they, they met with us, they brought some of the top people and we had a good discussion.

[00:29:29] Doug Chia: They didn't like lecture or scream at us. And the bosses would say, well, it sounds like a successful engagement. Meanwhile, I would talk to the investors like, no, um, you didn't give us anything. And then I had to explain to the bosses on the corporate side, the boards, well these people on the investor side, some of 'em need an actual action that they can show their bosses, that they got something tangible out of it.[00:30:00] 

[00:30:00] Doug Chia: And so they have a very different idea of what success is like, but so now you're saying it's almost flipped, now. The investor is looking at, okay, we got a better understanding and the companies are saying, give me some actionable information. And they're just not getting that. You know, in the book you also talk about how you say shareholders are defined more stringently today.

[00:30:27] Doug Chia: And you say that when it comes to shareholder engagement, companies have historically defined the term very broadly, but now companies want, companies may wanna reconsider whether they continue to engage with some of the organizations and whether that's beneficial. So what here, what are you talking about in terms of this kind of definition and range of what a shareholder is for, for purposes of engagement?

[00:30:55] Matt Filosa: Yeah. I, I think in our experience, and this has really evolved over the, the eight years I've been with [00:31:00] Teneo, working with companies, is that when I first started, it was almost, yes, the co we got a letter from a, a shareholder proponent or an an organization. Let's engage with them. We gotta engage with them, we gotta hear their story, we gotta give them our story side of the story, and maybe we can come to common ground.

[00:31:16] Matt Filosa: Um, but I think the cost benefit of that, and there were, there were lots of benefits to that. And, and the only, not, the only cost was time. There. There's a, as you know, Doug, a lot of, a lot of time involved in a lot of these engagements, prep work, et cetera. But the, the benefits outweigh the costs in today's world eight years later to us engaging with that same shareholder organization who has the same issue, uh, with what you're doing as a company for the eighth year in a row.

[00:31:46] Matt Filosa: You haven't come to common ground. You've listened to them, you've considered their perspectives, you've gathered other perspectives on this issue. They're not changing. Uh, we've decided not to change. The question, I guess comes to, is this still worth it? Is it [00:32:00] still worth to engage when we're not making any progress?

[00:32:03] Matt Filosa: When the shareholder, in our view, and Exxon made this point in their lawsuit, not to bring them in specifically, uh, last year, but of course they, they famously and successfully um, got some share of the proposals off the ballot. And part of their argument, and maybe this was editorial, but part of their argument was they're not really shareholders, these proponents.

[00:32:22] Matt Filosa: And that was their kind of argument. And I'm not saying that was right or wrong, but their point was they didn't have the best interest of our company in mind, financial interest in mind, like most large institutional investors do. That was their case. So we thought, well, maybe, maybe that's true, maybe that's not.

[00:32:40] Matt Filosa: But when we advise companies on whether to engage with either a pro or anti ESG proponent or shareholder or organization, you kind of have to rethink the cost benefit analysis. Are we gonna get this rich conversation where we're exchanging ideas, uh, on a particular topic? In some cases you still will and we still advising to do it.

[00:32:57] Matt Filosa: In other cases, though, it may not [00:33:00] be worth the cost. You hear them, you understand where their perspective is. You, you can agree to disagree and move on to your next engagement and try to allocate your time that way. So that's kind of how, what we meant about rethinking what constitutes, uh, an engagement and what constitute a productive and constructive, uh, engagement in today's, today's engagement world.

[00:33:20] Doug Chia: That's interesting in terms of this conception of what does shareholder mean, and I always got the question of, well, why are we even talking to these people? Like, who are they? They don't even own any shares. I dealt with the animal rights activists a lot, and you know, the organization itself didn't own any shares, but they found a member or a supporter who would file the shareholder proposal and then say, okay, these guys are gonna do all the negotiating on my behalf, and, and then they're out of it.

[00:33:55] Doug Chia: You don't, you don't even hear from them again. And it's like, [00:34:00] okay, this feels like an NGO posing as a shareholder just to further their special interest. I guess what you're saying is, yeah, maybe it's time we rethink whether that's even worth it. Like what's in it for us, if that's what these guys are doing.

[00:34:19] Matt Filosa: For sure. And, and, and, and setting aside the, whether that they have rights to submit a share of their proposal, those are all different questions to, to, what we're trying to talk about through here, at least in, in the paper, was how can companies think through their engagement strategy? How can they, um, more appropriately utilize their resources to get that cost benefit equation in their, in their favor, which is what they should be doing with all of their time?

[00:34:42] Matt Filosa: And this is both sides, right? Pro and anti ESG could have these potential, um, cost benefit analysis, help help companies think through what makes the most sense here. 

[00:34:51] Doug Chia: I mean, my thought was always, look, we have a good story to tell. Let's tell it. Let's, you know, shape the narrative here. [00:35:00] And others would say, don't waste your time.

[00:35:02] Doug Chia: They're, they're not here to be convinced and they're gonna trash us one way or another. So yeah, we're, we're wasting our, our resources here. Yeah. It sounds like that equation might have changed, um, in today's world. So let's talk about some of the more recent developments. Uh, you mentioned the interpretation of Rule 13 G and whether an investment can take advantage of that type of filing, if they have over 5%, as opposed to the, the more, uh, involved, uh, schedule 13 D.

[00:35:42] Doug Chia: What are your thoughts on this? 'cause it, it definitely created a bit of a, a ruckus when, when, uh, when it came down. 

[00:35:50] Matt Filosa: Yeah, for sure, for sure. Spooked a lot of investors and perhaps rightly so. Um, a as we know, you know, the, if the 13 D in, and you're right Doug, it [00:36:00] is a more extensive filing for sure, and

[00:36:02] Matt Filosa: nobody wants that. Uh, but it also is a, is is from a, at least from my experience, not the look where that institutional investors want to have, they don't wanna be activists. They don't wanna be 13 Ds in most cases. We've certainly seen them step up here and there when it was worth their time, but for the most part they, they, they're passive investors as as, as 13 G.

[00:36:23] Matt Filosa: So this is really a third rail, so it rightly so spooked a lot of investors. Um, and as we know, a lot of the investors suspended engagements while the legal departments could figure out what the new rules of the road were. A lot of them mentored, uh, engagement season with listen only mode, which again, to our point earlier about two-way conversations didn't help our prediction of having more two-way conversations.

[00:36:44] Matt Filosa: Um, but, you know, perhaps over the summer, uh, we didn't get any new SEC guidance on this. Um, we got some commentary, but not necessarily any new guidance on what is the line between 13 D and 13 G. Um, but I think there's a, to us at least a, a big [00:37:00] difference between how the passives react versus the actives.

[00:37:03] Matt Filosa: The actives, I think, are not maybe well used to being, understanding where the line is because again, active managers, portfolio managers talk to management all the time about these issues and, and understand where the line is. Maybe passives don't have that robust experience to draw from. And they, in our exp experience, again, in our view, got a little more cautious than some of the actives did.

[00:37:24] Matt Filosa: Um, at least that's some of the feedback we've gotten from some of our clients. How that evolves heading into this year's season is, you know, anybody's guess. Um, but I, again, I'm hopeful that at some point we come back to this rich two-way conversation, which we keep talking about Doug, because that's the value of engagement.

[00:37:43] Matt Filosa: Otherwise, we're just on a, as a company, we're just on a campaign tour. Maybe that's not a bad thing. At the end of the day, companies do road shows all the time, and maybe this is like a governance road show like we used to do in the past, and that's what this is now, and we're not getting the reaction.

[00:37:56] Matt Filosa: Yes, we'll buy right now kind of what reaction that we want, but I'm, I'm really [00:38:00] hopeful that we end up in a place over time to come back to this rich two-way discussion where we as a company or company representatives understand where you're coming from, investor A, B, C, and you understand where we're coming from and we can come to perhaps a common ground like we did to some extent, to some of these issues we talked about in the past.

[00:38:18] Doug Chia: There are heads of stewardship at major investment firms that they're talking to each other and they're saying, I remember where I, I remember exactly where I was when I heard about that. And it was like, okay, wow. That's kind of like, I remember exactly where I was when Kennedy got shot kind of thing.

[00:38:42] Doug Chia: And I was like, wow, is it that big a deal? And I was like, okay. I guess it was. And I don't think you can deny that there's, there has been a chilling effect, like you said, people had to step back and say, okay, how do we do this? And they did come out with a different approach in terms of, okay, we're more in listen only mode

[00:38:59] Doug Chia: now maybe we [00:39:00] won't take as many calls, but what is a company supposed to do kind of in the meantime while all of this is being sorted out? And maybe, you know, maybe there is a chill for a while, you know? So how do you get that information? In the absence of this two-way dialogue. 

[00:39:21] Matt Filosa: Yeah, that's a, that's a great question.

[00:39:22] Matt Filosa: And, and our, our council has been, and I'm sure there are lots of other ideas out there as well as we talked about disclosure. Does that qualify as engagement or not? And in some ways it does now, um, because things that you might have talked, tracked or left to the deck, uh, your engagement deck, you might want to put in, uh, the proxy statement because you may not get that meeting that you were hoping to get.

[00:39:43] Matt Filosa: Uh, whereas in the past years, you probably got that meeting. But also more, maybe more importantly in the engagements, if you're lucky to get an engagement, which we've had some success with our clients and getting engagements this fall, I think investors have done a, a nice job of, of opening up, continuing to keep their doors open and having engagements, [00:40:00] asking them the question like, companies shouldn't be held responsible for understanding how investor A-B-C-D-E has interpreted the 13 D guidance.

[00:40:10] Matt Filosa: We can't keep track of that as companies, right? So we ask them the question, Hey, how come you voted against this particular issue last year? Let them answer. They can say, we're not allowed to say, uh, refer to our policies. Or maybe they'll give us the answer we wanna know, but well, why did you do it? And they'll be transparent about it.

[00:40:28] Matt Filosa: So from our perspective, it's completely fair to continue in the engagement call to ask these questions that you've asked in the past and gotten answers in the past, and let the com let the investor for themselves to say, we can or cannot say that. And then now we know, okay, this investor has interpreted 13 D guidance differently than this other investor.

[00:40:50] Matt Filosa: So maybe we need to be in the engagement, more proactive about our disclosure in the deck or something like that. So that's kind of been our guidance. But our other, [00:41:00] other last piece that I would say is this responsiveness that we talked about earlier in this call, this responsiveness issue of this expectation from proxy advisors and investors for

[00:41:09] Matt Filosa: expecting companies to respond to a low vote, respond to concerns from investors, otherwise they're gonna vote against, you know, comp committee members or other board members. That concept has to be revisited by both proxy advisors and investors. And we talked about this at a conference earlier this year when this came out, because if you're not hearing as a company why you're getting the votes that you, you did, you got, how are you expected to be responsive?

[00:41:36] Matt Filosa: That whole two by two matrix that you might've invented, Doug, I don't remember what we heard, what we did. Right? That's the two by two in every proxy statement now, when, when, when companies, uh, disclose things, if you don't have anything in the, what we heard column, how could you do anything about it? And we saw at least one proxy advisor came out and said, we're gonna, you know, le lessen our, um, perspective on the [00:42:00] responsiveness piece because of this new environment.

[00:42:02] Matt Filosa: And maybe we'll see investors as they come out with their new policies as we're all eagerly awaiting this January and February to see if they lessen their response. Because that's really a big impact. Another big impact intended or not, uh, from this guidance. 

[00:42:15] Doug Chia: Yeah, so it goes back to the, you know, corporations, did they get any actionable information?

[00:42:21] Doug Chia: And if they didn't, then this, uh, you know, kind of this shut down one side of shareholder engagement, which is really not good for anyone as far as I can see. You know, it was also interesting that you said that it's almost like, well, it can't hurt to ask the question in terms of what does the investor think or why did you vote against, you know, our director or something like that.

[00:42:48] Doug Chia: Um, because I think some companies are saying, well, we don't ask them that because they're not gonna answer and we don't wanna put 'em on the spot. But, you know, you're saying, well put 'em on the spot. [00:43:00] And if they don't want to answer and they say, well, we're not comfortable answering, they'll say that, but maybe they do answer.

[00:43:06] Doug Chia: Um, and so I think that's really, really good advice. 

[00:43:10] Matt Filosa: Yeah. That, that, that's smart, Doug. We, we thought of that as well. And this, we don't wanna offend the investors and, and we get it. That's, that's true. We, we, none of us wanna do that. And I've asked a few heads of, of large asset managers this question. If they ask you this question, you can't answer it.

[00:43:24] Matt Filosa: Is that a point against them? And they answered no. So we tried to get pre-clearance on this strategy, right? 

[00:43:29] Doug Chia: Yeah. Yeah. 

[00:43:30] Matt Filosa: But I think if you can, you could do it obviously. 

[00:43:32] Doug Chia: How dare you ask that question. 

[00:43:33] Matt Filosa: Exactly. And I know you would do it in the right way and our clients would do it in the right way. You ask the question in a respectful way, acknowledging the environment we're in, acknowledging the guidance, still asking the question and you know, not reacting to a, we can't tell you in a negative way.

[00:43:47] Matt Filosa: It's okay, we understand and move on. Right. That's the way you can ask the question without you to your, your, your smart point, getting into that risk of, of offending them. 

[00:43:57] Doug Chia: Yeah. I mean I, I've been [00:44:00] hearing more people use this term, the art of the question. 

[00:44:03] Matt Filosa: Sure. 

[00:44:04] Doug Chia: And I think this is kind of where this applies in terms of yeah,

[00:44:08] Doug Chia: how you ask, what you, words you use, you know, and stuff like that. It, it makes a huge difference. And I think this is also where two-way engagement, over time, you build relationships. And in, when, when you have a real relationship, you are able to ask questions in a way that, uh, you know, you know, the other person will understand and, and not be, not be offended or not catch them by surprise.

[00:44:38] Doug Chia: And so, you know, recently the SEC chair, he's asking the question, are precatory shareholder proposals, are they even proper under Delaware law? Do companies actually even have to acknowledge these things? And, you know, this is part of this timeout that the staff [00:45:00] is taking on the no action letter, uh, deliberation process, but

[00:45:06] Doug Chia: when, when you heard that this, you know, precatory shareholder proposals, maybe they're not even proper questions for shareholders under de Delaware law. What was your reaction to this? 

[00:45:18] Matt Filosa: Yeah, my, my non-lawyer reaction was: really?

[00:45:25] Matt Filosa: I mean, I, I wouldn't be able to come up with a legal defense to, to that claim. Um, but I would say it's certainly not customary view of, of what I've experienced in, in this space over the past 20 plus years. Shareholder proposals are the, the, the main way that investors, at least some investors communicate, uh, with their, with their, uh, companies.

[00:45:48] Matt Filosa: Um, so yeah, I can't, you know, can't say it is or isn't legal, but it certainly would. And, and, and, and, and maybe this is part of the point. The US is, as you know, Doug is one of the few [00:46:00] markets who have so many shareholder proposals. We have other Europe markets that have a few here and there that come in and some who don't allow shareholder proposals.

[00:46:08] Matt Filosa: But the US is the land of shareholder proposals, and maybe that's because we're the land of free speech and expression and all that good stuff. Maybe that's where that's come from. So my initial reaction was: really? We are the land of shareholder proposals. I thought that's why we had so many, but perhaps not.

[00:46:24] Doug Chia: Yeah, my, I think my legal and non-legal reaction was: what? Really? I'm not so sure about that. Um. But I think, you know, uh, se chair, SEC chair raises the question and now people are gonna debate it. So we'll see where this goes on shareholder proposals. Now the, the White House has come out with this executive order about also asking the questions.

[00:46:51] Doug Chia: Maybe we just rip up rule 14a-8 and just repeal the whole thing. What would that do to the shareholder [00:47:00] engagement environment or, or the whole like system? If you just take this, take this one very important tool just out of the toolbox, how would investors adjust? You know, how would you look at companies in terms of how they adjust?

[00:47:20] Matt Filosa: Yeah. Yeah, I think it would, it obviously would complicate a lot of things for both companies and investors. 'cause as, as you know, Doug, the 14a-8 you know, action process was kind of like a safe harbor for everybody. It was the umpire, oh, who's, who's, who's gonna make the call? Well, the SEC will make the call, and then everybody's good.

[00:47:34] Matt Filosa: Most times everybody's good with it. There's obviously some challenges to that, but now we don't have an umpire, or in this case we have an umpire who's always saying the company is safe, meaning you can omit the proposal, which is what the SEC is doing. That creates a lot of problems for companies that, um, may or may not have been thought through.

[00:47:53] Matt Filosa: Um, one, they don't have now as much legal comfort as they did before, uh, because the SEC is not really [00:48:00] analyzing these issues, as they said, for themselves. Um, two, they now have to deal with their investors, uh, and figure out, okay, are we gonna be viewed as disenfranchising shareholders and taking advantage in some view of this new SEC process?

[00:48:16] Matt Filosa: And, and if so, how can we help manage that? If we do end up bouncing some proposals based on our legal analysis, how can we continue that relationship to, to ensure that we're not doing that? And should we omit all of them versus some of them? And what will the proponent say when we omit his or her proposals?

[00:48:34] Matt Filosa: Will they submit a vote no campaign like they did at Microsoft? Uh, will they submit a binding proposal, which isn't part of the 14a-8 process? Will they sue us? Uh, will they name and shame us? Will they show up at the meeting and submit the proposal anyway? Which as you know, legally in most states, you can still do.

[00:48:50] Matt Filosa: So this creates other unknowns when it comes to shareholder proposals and really affects the strategies of companies, at least in our [00:49:00] experience so far, because whereas the, as we said, we had an umpire, we had a kind of a safe space to get the answer, and now we don't. For proposals that we know we would've gotten no action requests last year,

[00:49:13] Matt Filosa: should we do it again or should we put it on the ballot? Because now it opens it up to this argument about disenfranchisement.

[00:49:19] Doug Chia: And, and I've been talking to companies and their advi, their advisors about this, that question in terms of do we, uh, kind of take a softer approach and say, yeah, we know that this proposal would've gotten in if the SEC were still playing the umpire role, but others saying, no, let's test this.

[00:49:41] Doug Chia: Let's just exclude a lot of stuff and see what happens. Um, you know, what's the worst that could happen? I've also heard, you know, you were talking about other avenues, you know, it's kind of like that doesn't mean that people's grievances just go away and they'll find another way to get [00:50:00] this communicated.

[00:50:01] Doug Chia: Another clever way I've heard of that was actually used a couple times is let's use universal proxy and where the rules are totally different and we can put whatever we want on those ballots and really make the company react that way. And I think commit, to me that's like the unintended consequence that corporations really should think about and, and frankly, fear.

[00:50:27] Doug Chia: 'cause that's kind of the wild, wild West. 

[00:50:29] Matt Filosa: That's a smart point, Doug, thank you for, for flagging that. We hadn't thought of that one. Um, but I, I think at the end of the day, companies will have to figure out, you know, one, just because you can doesn't mean you should, but two, how can we communicate whatever we end up doing, uh, on those who get share of their proposals?

[00:50:46] Matt Filosa: How do we communicate to investors how we went about this this year, whereas in the past, go look at the 14a-8 and you can see what we did. We tried to bounce it. We couldn't get all publicly available on the SEC site. Now you, there could be [00:51:00] possibilities for proxy disclosure to kind of explain which ones we omitted because of this and which ones we kept in because of this.

[00:51:06] Matt Filosa: We saw at least one company do that this week. Um, and, and, and, and, and get, get ahead of that potential argument that companies are misusing this new pro, this new shiny tool that they have. Uh, with the 14a-8. 

[00:51:20] Doug Chia: So the other point or I, I think actually the main, the, the, the main substance of this executive order goes after the proxy advisory business.

[00:51:32] Doug Chia: And this is not a new issue at all. It's been kind of there since, since the beginning of, you know, when these firms first started rising. Obviously this is directly gonna affect the proxy advisory business, but, but how does it affect the company? Um, say that the proxy advisory business is just shut down.

[00:51:53] Doug Chia: You know, it just can't exist anymore. What's a company to do at that point? 

[00:51:58] Matt Filosa: That, or things go underground, which [00:52:00] is kind of where they're going if they continue to exist. They're going underground, meaning, um, either recommendation lists, reports, or no longer having a house view and really customizing their perspective to their investor clients and therefore not having a house view to go by.

[00:52:16] Matt Filosa: Right? So as you know, when you had the Glass and ISS reports come out, you as a company knew where you stood. You knew you had an uphill battle or an easy road to your AGM. If you had a negative recommendation from, say, on pay from both ISS and Glass, you're 30% behind right off the bat, right? Um, so you kind of knew how to strategize and knew how to resource.

[00:52:37] Matt Filosa: If that goes away in, in your, in your supposition, Doug, and you don't have a house view to go by, what does ISS and Glass Lewis think now you have no idea how investors are starting to think about your, say on pay vote, for example. None. You might have an inkling, oh, we increased pay and performance was down.

[00:52:56] Matt Filosa: You can run your own model. You can look at things and try to project, but you don't really [00:53:00] have a firm grasp of where you stand heading into your AGM once those reports come out like you did when, when, when he had ISS and, and Glass, um, alive and well in this scenario. Um, and that's gonna create all kinds of problems for you as a company because now you don't know where you're starting from.

[00:53:15] Matt Filosa: You don't know how to cater your deck. You don't know how to rebut. You could rebut the ISS report all over the, you know, things you could do in your decks and, and put out additional proxy disclosures. All the tactics you're used to, to combat the narrative. When you don't know what the narrative is, you can't combat it.

[00:53:32] Matt Filosa: So you've gotta go unfresh with all your investors. Say, what do you think if you're saying on pay or say on pay this year, and if they can't say anything, bring in the 13 D guidance. 

[00:53:41] Doug Chia: Yeah. It, it all works together. And I think in some ways. You know, this could make shareholder proponents or shareholder activists even more powerful, because now companies can't say, well, there's this proposal,

[00:53:55] Doug Chia: let's see what ISS has to say before we react. [00:54:00] Um, now it's like, well, we don't have that, so we have no idea. Let's go ask our shareholders. Well, they're not willing to talk to us. And then it's like, okay, now what the heck do we do? So I think this is another, don't rejoice that this is, you know, Hey, it's Christmas and Hanukkah.

[00:54:18] Doug Chia: This might be the lump of coal. 

[00:54:22] Matt Filosa: Yeah. And, and where will investors go? I mean, they, they need some system to vote their thousands and thousands of meetings as we know, some system to triage. They're not gonna read through the proxy statements. They're not gonna hire a hundred people and their stewardship teams, they're gonna have to figure out how do we replace ISS and or Glass if your scenario comes true.

[00:54:40] Matt Filosa: And the likely candidate, uh, today, at least in the clubhouse is, is AI. They'll upload their, they could upload their policies. They could upload all their voting data. They could upload the proxy statement and say to AI, how would we vote? Right? And as, as at least a first cut, and as an, as a company, you have no idea what the AI says.

[00:54:59] Matt Filosa: Maybe [00:55:00] companies could start building tools. Maybe consultants like us could start helping companies figure out how investors are thinking through the use of AI. That's a nice project for us. But, um, yeah, everything, if everything goes dark, uh, yeah. Hard to strategize. 

[00:55:13] Doug Chia: Yeah. Again, AI is both the dream and the nightmare.

[00:55:17] Doug Chia: It's like, imagine what a, you know, this term hallucination that people use with AI coming up with like just wrong or fake stuff. Imagine what the hallucinations are gonna look like. I think a lot of directors and CEOs don't know, is that the proxy advisory firms, they're not just in the business of giving recommendations, they serve a very important purpose of, you know, giving, you know, giving the investors kind of the tools and technology to actually carry out these votes.

[00:55:54] Doug Chia: And without that, you know, they probably have to hire a ton more people. Maybe, you [00:56:00] know, uh, investment management fees go up. It's, uh, that, that's not so great either. There's a reason there, there are a lot of complaints about the proxy advisory firms and, and a lot of it's very legitimate. Shifting gears a little bit, some of the largest asset managers have announced that they are taking their stewardship teams and splitting them into two.

[00:56:27] Doug Chia: What's that all about? 'cause I'm still trying to figure out, you know. Why are they doing this? And, and what's the implication? 

[00:56:35] Matt Filosa: My perspective on it is, uh, there's a couple benefits to doing that for them. Um, one, I think there is a, uh, a really good argument, at least in, in, in the case of splitting, what BlackRock did, they split their active and their passive voting.

[00:56:50] Matt Filosa: Um, I think there's a great argument that those two folks look at the world differently. Uh, time horizons or otherwise. Um, I kind of always equated active managers and [00:57:00] passive managers like dogs and cats. They're both in your house. They both look out the window. The dogs are looking at the squirrels, the cats are looking at the birds, right?

[00:57:08] Matt Filosa: They have different motivations, different interests. 

[00:57:09] Doug Chia: Yeah. 

[00:57:10] Matt Filosa: And active and passive, I think lends to the voting potentially being different to voting outcome and thinking about things different. So I think that's actually a, a very smart thing for BlackRock to do, uh, in that sense. It may also help them politically saying, we're not so big.

[00:57:24] Matt Filosa: We're not a big monolith. We don't vote as this big block. We have different perspectives within house, in-house. And they have more than that, right? They have their voting choice program, which we can talk about too, to give their retail holders the option to either vote with management or vote with ISS or vote this way, that way, kind of customizing this vote outcome.

[00:57:41] Matt Filosa: So again, like the advisors. Also kind of going away from this house view where this big block is gonna vote this big way. They're saying all we, we are big, but we're made up of a bunch of little things. And these little things all kind of vote differently based on their [00:58:00] perspectives. I think that's a fair way to, to view what they're doing.

[00:58:03] Matt Filosa: Um, and, and based on, as you're, if you're a customer or, or, or investor in BlackRock or Vanguard or State Street or others, I can choose, you know, what, where I want my shares to be voted. Where do I live on that spectrum of voting, and I think that's a great thing for the, from a competitive perspective as well.

[00:58:19] Matt Filosa: Um, what, what that means for companies not so great news, right? First, I gotta engage now with two sides of BlackRock's house. Doubles my engagement. Uh, it was, uh, uh, bandwidth, uh, to two. Um, and now I'm not exactly sure I have a good feel of how the actives are thinking and I gotta build that relationship.

[00:58:37] Matt Filosa: I've had, you know, I have, I've built a great relationship with BlackRock as a company over the past 10 years. I know people over there. I'm speaking as a company, now I gotta do the same with the pa with the active side of the shop. 

[00:58:48] Doug Chia: I don't even know who they are or what their email address is. Yeah. 

[00:58:52] Matt Filosa: Exactly,

[00:58:52] Matt Filosa: exactly, exactly. How do they think? And now with Vanguard, I know Glen is leading, uh, half of the Vanguard, which is great to see. A lot of folks know him. He's great, [00:59:00] obviously. People know him. Um, they re-engage with him and his team to figure out, uh, where their views might split from the other side of their house.

[00:59:07] Matt Filosa: Uh, same with SSGA. So it really complicates both the engagement side for companies as well as kind of trying to predict and have that feel and relationship to how, uh, this, this block of shares will vote. 

[00:59:20] Doug Chia: Arguably this was already happening, right? I mean, I would talk to large investment firms and say, okay, how are you voting on this?

[00:59:29] Doug Chia: And they say, well, we kind of let the individual portfolio managers figure it out. Yeah, we have a house view, but they're allowed to do whatever they want. Isn't, you know, is this kind of actually maybe organizing that better? 

[00:59:43] Matt Filosa: Yeah, I think that's a great point, uh, Doug, that that is true. I think many investors did have that.

[00:59:48] Matt Filosa: I, I guess the question is, did that have really an impact on the vote outcome, given the scale of, you know, you're, you're absolutely right. Some PMs can go off on their own and, and vote against the house view, but I [01:00:00] think we were never able, able to unpack an impact of that, at least on the vote outcome with this kind of sizable division at scale, you can imagine it having an impact, whereas, let's just take BlackRock, the active takes one position, the passive takes a different position.

[01:00:19] Matt Filosa: You, you might be able to see that coming through in your vote results and being like, oh, we really, we, we didn't hit it out of the park with the actives, but we got the passives on our side. And that might change your outcome. Whereas in the past, if you hit it outta the park with the passives, you got got most of the votes in your favor.

[01:00:36] Matt Filosa: But you're, you're right, it has been happening. But to me, these changes are, are such at scale it could have a real impact on outcomes. 

[01:00:42] Doug Chia: So you mentioned, you know, what people are calling pass through voting. BlackRock started this a couple years ago. They say, okay, you know, people criticize us for controlling all the votes.

[01:00:53] Doug Chia: Uh, we're gonna put the votes in the hands of, of the fund holders, um, people like you and [01:01:00] me who are who, who own, you know, whatever S&P 500 index fund shares. And they can decide, and we're gonna democratize the whole thing. What shape does this take and do we know how frequently this is being used?

[01:01:18] Matt Filosa: It's such an interesting idea to me. And not to go too far back in history, but in my world, 15 years ago, our board and we were an active manager, our board who represented our retail clients, we of course had institutional clients as well, asked the same question. This was a while ago. Um, how come we don't poll our retail investors to figure out how they wanna vote?

[01:01:42] Matt Filosa: And of course the answer is, do you know how much work that is? How much money that'll cost? 

[01:01:46] Doug Chia: That would be very expensive. Yes. 

[01:01:48] Matt Filosa: And what do we do with the information when, you know, and, and the legal answer was, well, they're not technically holders of the shares, their holders of the fund shares not of the underlying securities, as you know very well.

[01:01:58] Matt Filosa: So, you know, we had [01:02:00] answers for that back then, but, so I'm just fascinated that it's happening in real happening now. Um, but to your question, you know, so far, at least from what we could read, it's not having a material impact on vote outcomes. Meaning, um, yes, it's offered to a lot of retail holders at these shops, but there's not a tremendous amount of uptick in

[01:02:19] Matt Filosa: how they're voting. But there was a study listed on the Harvard blog, I don't know if you saw it, Doug, that they, they tried to figure out how those retail holders who did elect to vote were voting. And interestingly, the study found that they were voting against management more often than the house, uh, the fun shop.

[01:02:37] Doug Chia: Oh, okay. Interesting. 

[01:02:38] Matt Filosa: So, 

[01:02:38] Matt Filosa: so bad news for companies, if this gets traction, if that study is, you know, holds, um, that perhaps retail holders aren't as friendly as we thought. 

[01:02:49] Doug Chia: Yeah. That, that's actually, that's an interesting finding because, but now that I think about it and makes sense, right? It's the people who are gonna use it are the people who care enough to, to [01:03:00] actually use it.

[01:03:00] Doug Chia: And those are probably the ones who are kind of discontented, you know, the, this, it's a self-selecting crowd, um, who actually use it. But how are they, you know, is their disclosure about that? That was my concern. It's okay, if BlackRock votes a certain way, they have to report it later on, on the NPX filings, you, you toss it to the retail shareholders.

[01:03:29] Doug Chia: I mean, they don't really break it down who use that, right? 

[01:03:33] Matt Filosa: Yeah. It, it'll only, you're right, Doug. It it only come through on the NPX or the public filings if they vote co, you know, and, and we know they don't have, I, I don't believe they still have the shares listed in the NPX in terms of how many shares voted this way or that way.

[01:03:48] Matt Filosa: But if we see, let's say let's take a company XYZ and you see it in the BlackRock's NPX, we wanna know how did BlackRock vote. That company XYZ is probably listed twice because, or, or maybe three times, [01:04:00] depending on how many different ways the House voted at company XYZ. And the key question is how many shares for each?

[01:04:08] Matt Filosa: That's what a company wants to know. They don't care that a hundred shares voted against them. They wanna know. Did a lot of, a lot of shares on the retail side, and I don't think we have that level of disclosure. Um, we've had, I've seen disclosures and I think they're relatively well done. How many retail holders have signed up?

[01:04:24] Matt Filosa: How many of funds of our total assets are offered this service? Great information. And maybe they'll get to a place where their vote disclosures have this bifurcated information, as you're saying, to help companies understand where is this retail vote, uh, going to be able to those who do do end up voting.

[01:04:43] Doug Chia: Yeah. The other thing, you know, I, I was wondering when BlackRock came out with the announcement. The announcement was essentially, we're working on this and we will implement it at some point. And so they didn't really say what it's gonna look like and then, then we started to see what, [01:05:00] okay, what does this look like?

[01:05:01] Doug Chia: And the choices are not, you know, okay, you shareholder get to pick and choose every company that you wanna vote on and you know, vote. How you wish it is: here are five policies, uh, created by ISS. 

[01:05:20] Matt Filosa: Right. Robo voting. 

[01:05:22] Doug Chia: In terms of, in terms of the, uh, you know, almost like thematic voting. And you pick one of the five and one of them is always vote with management.

[01:05:32] Doug Chia: And, you know, when I saw that, I was like, oh, wow, I if that, that's the idea of pass through voting and giving me a choice that, that I was, I was kind of thrown for a loop on that one. So, so it was interesting and it's like, okay, well here's, here we go with ISS again. You know, it's like, 

[01:05:51] Matt Filosa: Exactly, exactly. 

[01:05:52] Doug Chia: What are we doing?

[01:05:52] Doug Chia: You know? Okay, now they give me a choice to use ISS as well. So it felt, it felt weird to me. [01:06:00] 

[01:06:01] Matt Filosa: It is, it is interesting. And, and I think, and I, I don't know if you want to get into the, the retail voting, um, structures that have come out this year, uh, where, you know, retail shareholders of a particular company have given the, got the option to automatically vote with management on all items in perpetuity with the option to, uh, you know, on unwind that and, and vote counter to that, that, that seems fair.

[01:06:21] Matt Filosa: I think that that which, which seems like a good idea. It may be a good idea. Um, the criticism to that has been why aren't you giving these retail holders the option, to your point, Doug, to vote against management and perpetuity or to vote with I like other options other than voting with management? And, and my action is why would a company do that?

[01:06:39] Matt Filosa: There's no, there's no great, great. That, that might be more fair, but, but why, why would a company give their retail holders options to vote against them in perpetuity? That doesn't make logical, logical sense to me. Um, but yeah, theoretically that is a, a counter, uh, to, that it's a little different than the what, the, what the investors are doing, but something in the market to watch.

[01:06:59] Matt Filosa: Right? [01:07:00] 

[01:07:00] Doug Chia: Yeah. And, and to me, part of the interesting thing is that, I mean, you and I have gone, you know, we've been around long enough to where these ideas are not new, but when they were first brought up, the regulators had a view that you're, you're not allowed to do this. You know, at least in those meetings I was in, they said, no, you, you can't do this for various reasons.

[01:07:24] Doug Chia: We don't have to get into that here. And now it's like, well wait a second. So now it's okay? Did the rules change? Is this just, you know, personnel at the SEC, you know, takes a more modern view of this? All of this is interesting to watch and I'm sure we'll get even more stuff. So Matt, thanks a lot for joining me to talk about all these interesting things, you know, past, present, and future.

[01:07:48] Matt Filosa: Great. Thanks for having me, Doug. And I enjoyed the conversation. 

[01:07:51] Doug Chia: So that concludes this episode of The Public Company Series podcast, powered by OnBoard. I'd like to thank Matt [01:08:00] Filosa, Senior Managing Director, Governance and Sustainability at Teneo, again for sharing his insights on shareholder engagement.

[01:08:09] Doug Chia: And I encourage you to read the chapter of the book written by Matt and his colleagues, the Future of Shareholder Engagement, which you can find in the book Board Structure and Composition part of the Public Company Series published by the New York Stock Exchange and JP Morgan. You can read and download the entire book at www.nyse.com/pcs.

[01:08:34] Doug Chia: To learn more about our sponsor OnBoard, visit www.onboardmeetings.com. For additional resources and episodes visit www.publiccompanyseries.com. And don't forget to subscribe to receive all new episodes of the Public Company Series podcast. And please rate us and leave us a review. I'm Doug Chia, and we'll see you next [01:09:00] time.