Two sides of the same story

Board engagement with a few dozen significant shareholders might seem a world apart from communicating with thousands more through the annual proxy. But as Richard DeWolfe, chairman of Manulife Financial Corp., explains in this exclusive interview, they can be directly linked. At one level, feedback the board gets through engagement can influence specific proxy items ranging from compensation to ESG. More broadly, each effort holds a critical place on the continuum of effective shareholder communications

Engaging: Manulife chairman Richard DeWolfe holds dozens of individual shareholder meetings each year “to reinforce the notion that our board is there to represent their interests”

Listed To what extent is Manulife’s shareholder engagement focused on proxy season?

Richard DeWolfe A year ago it was a very significant effort on our part because one of the issues that we were dealing with was a vote on our say-on-pay and so we launched an initiative focused on the proxy season to discuss changes to our compensation program that would be reflected in 2017, 2018 and 2019…But it was actually a dual effort. Most of the investors that we spoke to prior to proxy season were essentially the same institutions whom we had spoken to earlier in the year as part of my regular outreach.

Listed When do these later discussions take place?

Richard DeWolfe Starting in September and ending in November. [But I should emphasize that] the focus of that engagement for the previous three years was not about the proxy. It’s just an appropriate time of year to actually reach out to shareholders because by then they’ve had an opportunity to see a half-year’s results. Our third quarter is generally released in the second week of November and so we try to accomplish our shareholder engagement prior to the release of those earnings.

Listed So as we do this interview, you’re right in the middle of that fall engagement process now?

Richard DeWolfe Exactly. I did 11 meetings last week and I’ll be doing 10 to 15 this week. In fact, I’m heading to Toronto tomorrow and almost all of my time there will be absorbed with shareholder engagement.

Listed Last year, in the Governance Professionals of Canada annual awards, Manulife won for best engagement by a governance team. In light of that, can you expand a little on your objectives for this period?

Richard DeWolfe I sit with our investor relations staff and we review our shareholder list in terms of, first of all, who are the really major holders of the security, and then we look at those institutions or individuals who have been adding dramatically to their position or who have been downsizing their position. And then we also discuss investors whom we think are a good match for us, who should be interested in our company, as well as those who we’ve invited to participate before but declined for one reason or another.

We try to manage that list to give us an opportunity to reasonably schedule all of the meetings. I think the high point [since I became chair in 2013] was probably 42 or 43 of those investors.

The directors’ component here, which I think is the most important, is touching shareholders from the board’s perspective to discuss governance and to reinforce the notion that our board is there to represent their interests and we want to understand what their interests really are. And so looking at those discussions, for instance, sometimes we’ve got the value investors, sometimes we’ve got investors who are in for what they see as an opportunity, so there are all different strategies that they employ in terms of owning our shares, and the more that we can understand about what kind of investor they are, the better it is for us in terms of being able to characterize the kinds of owners of Manulife that exist out there.

Listed So in 2016, because of the scenario you were facing around say-on-pay, that was a key focus of the engagement?

Richard DeWolfe There were two pieces in 2016. The primary reason for my calls is governance. But when the 2015 proxy landed—which would be in 2016—we saw our results on say-on-pay decline from over 90% to about 77%. And in our original shareholder engagement, we were getting, for the second year in a row, considerable pushback on our executive compensation, and the issues of transparency and of understanding the metrics that go into the computation of the CEO compensation and the NEO [named executive officer] compensation.

So the board undertook a review of compensation to try to address those things that they thought we were hearing in order to determine that we were actually on the right page. Without disclosure of what we were thinking about, we [then] went back to shareholders—some we had spoken to earlier and some we had not spoken to at all—and we basically engaged them, each in 45-minute to one-hour discussions all around say-on-pay.

We told them in advance that this was what we wanted to discuss. We wanted to try some ideas out on people in terms of what they thought about ROE, what they thought about TSR [total shareholder return], what they thought about the whole issue of how to measure CEO performance. And we got a lot of feedback, which then was fed back to our compensation committee.

So that effort in 2016 was a dual engagement basically. Some shareholders we had talked to twice in the year, some we talked to just about governance and the others we talked to just about say-on-pay.

Listed The subsequent say-on-pay vote was more than 84% in favour. What impact did the engagement on compensation have on the ultimate formula you chose and presented in the proxy?

Richard DeWolfe On the basis of shareholder recommendation, the board adopted a new model for executive compensation that reduced the number of performance metrics from seven to four. We heard all kinds of differing opinions from shareholders. We took those all into consideration, some of them were adopted, some of them weren’t, but our focus was as a board, let’s get the clearest, most transparent, most closely aligned parameters that we can that represent the shareholders’ view of how executives should be paid for their performance.

Listed You’re on record saying that in this year’s engagement you’re focusing on succession and also culture. Yet as the proxy season arrives, one or more hot-button issues often emerge. Does this play into your planning for these fall engagements?

Richard DeWolfe Each of the calls that we plan is for one hour. In terms of the initial opening statement, I might spend five or eight minutes discussing the two focal points that I wanted to raise—in this particular case, succession and culture. But that is not the limitation with respect to those calls. For instance, I think I did 11 last week; of the 11, eight of them wanted to discuss our ESG strategy. So clearly this is really an emerging concern for shareholders. It wasn’t on the top of my list, it’s rising quite quickly there. And we have a fairly robust approach to ESG, which obviously we are going to need to highlight. Because it’s something that our investors are now interested in.

So, when I say succession and culture, I just simply talk generally about the approach to open the discussion, because in our case this year, [with the appointment of Roy Gori as CEO], succession has been a big thing, people want to understand the governance approach to that, but that’s a discussion which probably doesn’t take up half the call—if they’re satisfied. It’s meant to simply be my opening statement and the rest of the call is essentially their questions.

Listed Not to belabour culture, but previously you’ve said that the winners in overall market cap would be companies that have the best or the right culture. That’s putting a pretty heavy emphasis on culture, which can be a rather intangible thing. Can you expand on that?

Richard DeWolfe I think this is particularly true in the field of insurance or, to a certain extent, in the wealth and asset management businesses, because there are more similarities between competitors than there are differences. So, you know, if we invent a new insurance product, it will probably take Sun Life or Great-West 60 to 90 days to launch something which is similar, maybe even less. And the same thing is really true with respect to the issues of wealth management. If someone comes up with a great robo-adviser, someone else is probably going to be right behind you in terms of doing it. So, fundamentally, the secret sauce from my vantage point, the secret sauce in winning organizations, is the culture that drives the innovation, drives the customer service, drives the passion and purpose of the organization. Without that, you’re just the same as everybody else. So to me, culture is the great divide between those organizations that are able to transform themselves and those that continue to just be copycats.

Listed Proxy season is also about the proxy document itself. You’ve said that when you joined the Manulife board, you didn’t think the company’s proxy was very well put together, and you worked to change that. What changes were adopted, and why?

Richard DeWolfe When I arrived I found the document loaded with legalese and what I would call industry expressions, so it was really difficult to actually read it. And in many cases you had to refer to multiple sections within the proxy in order to be able to understand it. It also had a fair number of footnotes, and it was not particularly attractive physically.

Coincidental with a fair number of changes on the board, the directors as a whole began to really push the notion that we needed to remake our approach to the proxy, its physical and its written form. And each and every year for the last five or six years, we have really made an effort to make the document investor-friendly and take into consideration that the readers of the document are everything from individual investors—we have lots and lots of individual investors—to institutional investors. We want to provide disclosures within the document that are easy to understand and easy to read and give the shareholder as clear a view as possible to the operation of the company. In terms of the whole investor/ shareholder-engagement exercise, the proxy is probably the most important communication of the year. Because it’s really the only time the vast majority of shareholders actually get communication from the company and from the board itself. So it’s really important to have that document representative of the way you want them to understand the operation.

Listed Are there any other important factors?

Richard DeWolfe The general counsel and the corporate secretary have got be the leaders in dealing with what I would call proxy reformation. If you’ve got a strong general counsel who takes responsibility for assembling the legal necessities of the document and a corporate secretary that’s focused on form, format and transparency, then you’re beginning to put together a real good team of people.

Listed It still seems like a lot of companies treat these improvements as a nice-to-have rather than a need-to-have. To you they’re a need-to-have, then?

Richard DeWolfe Exactly. It really is. It’s a significant expense to actually transform the document because it takes more people and more time and certainly significantly more review to assure that you’ve got a document with integrity. And then putting it in a form and format that’s attractive is also critical. So there’s expense associated with all of that. If you’re a smaller company, I can understand that you’re going to be economizing and providing the absolute necessity in terms of the document but nothing more. But I think that it sort of reflects the culture that you’re trying to demonstrate. When we talk about customer-centricity, there’s also shareholder-centricity, and everybody talks about how to treat the customer. Our board is concerned about how you treat the shareholder. So I think that’s one of the things you really need to have, this sort of shareholder-friendly communication, whether it’s personal engagement or whether it’s in the documents that are sent.

Listed You mentioned you’re hearing more about ESG this year. Is that likely to find its way into the proxy in a different form than you maybe anticipated?

Richard DeWolfe If it continues on this trend, I would say yes. We’re going to have to be more expansive with respect to that subject. We covered it off last year, we’re signatories on a number of different initiatives with respect to sustainability; we’ve had an active program with respect to the environment generally. And the fact that we do a lot in the area of natural resources with respect to green, I think gives us an imperative to be clear where we stand on all of these issues.

You know, there are two different aspects from our standpoint. One is in terms of the investments that we hold, and the second is the businesses that we operate. There’s two different aspects to ESG for us.

Listed I gather this even includes activities in things like timber and agriculture?

Richard DeWolfe John Hancock Natural Resources, which is an important part of our overall wealth platform, is the largest institutional manager of timber in the world. And we are the largest U.S. institutional manager of farmland. We operate farms in virtually every area of the food chain—grapes, nuts, wheat. And we actively own oil and gas operations, now. So in the key components of what would be the ESG arena, we are a performer and operator as well as an investor.

Interview by Brian Banks; photography (story and slider) by Jeff Kirk

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