Long insulated by oceans of
historical precedent from the shareholders they represent, some valiant
directors and boards are venturing into uncharted waters as they explore
ways to open up communications channels with investors.
Although these ‘first encounters’ often spring from controversy – perhaps a
looming proxy resolution – they quickly become productive as each side
learns why the other is taking a particular position. Shareholders don’t
necessarily expect boards to spontaneously reverse their stand on
contentious issues. Instead, they seek to communicate in an unfiltered way
with governance decision makers. For their part, directors are eager to
explore firsthand what’s on shareholders’ minds.
Whether they’re exchanging emails or letters, talking by phone or face to
face, or just listening respectfully to investor concerns, directors
engaging with shareholders usually discover that open communication makes
good business sense as well as good governance sense.
‘It is essential that there be a two-way street,’ says Ralph Walkling,
executive director of Drexel University’s Center for Corporate Governance.
‘Having an open exchange of information and letting shareholders know
exactly what is going on with the company enables them to accurately price
the assets and better understand the firm’s strategy. What better way to
meet the needs of shareholders than to open up communications?’
Opening gambits
Sometimes a more defensive strategy, such as avoiding conflict, drives the
process. Shareholders today have ‘more power at the ballot box’, comments
Patrick Quick, partner at law firm Foley & Lardner. ‘The more power they
have, the more important it is to try to communicate with them so they don’t
use their power against management and the board.’ According to Quick,
shareholder conflict affects companies when it takes the form of
‘shareholder proposals, withhold vote campaigns, shareholders selling stock
or shareholders pursuing hostile actions against the company.’
Although damage control can pose a valid reason for director-shareholder
communications, a small but growing number of companies are embracing that
dialogue as a legitimate part of the corporate governance process.
Institutional investors acknowledge the merits behind the various reasons
for establishing regular shareholder dialogue.
‘Any company that’s engaging with us should understand there is
self-interest for doing so,’ explains Tim Smith, senior vice president at
Walden Asset Management. ‘In other words: what’s the business case? It may
possibly build goodwill; it may lessen ill will; it may protect reputation;
it may give you intelligence about what your shareowners think are
controversies. And, on occasion, it actually leads to people saying, This
dialogue is very meaningful. I have no need to pursue a shareholder
resolution in the public domain.’
Smith says those possibilities are a ‘good checklist of self-interested,
business-case reasons’ that often are – and should be – part of the
equation. But he adds that ‘there are many, many, companies doing this
because they actually believe in the concept that the shareholders are the
owners, and that this is the way companies are supposed to be governed.’
Controversial origins
Stephen Deane, team leader of RiskMetrics Group’s governance exchange, says
‘controversy’ initially impelled the boards of some US companies to begin
dialogue with shareholders. Once those boards started to engage with
shareholders, however, they found it was so productive and helpful that they
continued their dialogue past the issues that had initially brought them
together. In a research paper, ‘Board-shareholder dialogue: why they’re
talking’, Deane presents ‘case studies of six companies whose boards met
directly with shareholders on governance matters.’ He notes that there was
wide diversity in the ways in which boards made face-to-face contact with
shareholders (typically institutional investors or large shareholders). It’s
important to decide whom the board should meet with, he says. ‘Is it just
the largest shareholders, à la Pfizer?’ he asks. ‘Or do you have a
cross-section of your largest shareholders plus ones that are vocal and
active on certain matters and predictably interested in certain issues like
say on pay, such as Occidental Petroleum?’ Meeting formats and board
participants also vary in Deane’s paper. The meetings range from one-on-one
dialogues with a board member or a committee chair to meetings between
groups of investors and a board committee, or even the entire board. Deane
reports that the governance committee at McDonald’s brought in a panel of
experts to discuss the topic of declassifying boards, inviting a group of
investors to hear their views. At UnitedHealth Group, meanwhile, directors
meet regularly with a standing committee of investors and others who give
advice regarding ‘board skill sets and director nominees’.
Meetings initially designed for directors to be in a listening mode almost
immediately changed into ‘really engaged dialogue,’ recalls Deane.
Establishing expectations with an agreed-upon agenda, having the right
people in the room and coming prepared with a good understanding of the
issues all contribute to a successful outcome. Even without a specific
agenda, participants can expect ‘sincere listening’ and ‘constructive
dialogue’. He does, however, add that ‘you don’t really expect the board of
directors to suddenly announce that it has reversed a position in this
meeting. That would be somewhat unrealistic.’
‘I want to have a discussion with the people who are going to make the
decision, not a staff person who is going to filter what we’re saying,’ says
Smith, commenting on investor expectations. ‘It’s inappropriate for us to
put directors on the spot.’ Whether or not change occurs, investors believe
the opportunity to express their views to a decision maker who takes their
position back to the full board for discussion is a ‘major step forward,’
Smith adds.
Making friends and influencing people
Even companies not inclined to open up board-shareholder communications may
have to change course, simply because directors are more accessible today.
‘In the past the board of directors was a list of people on the back of an
annual report and you didn’t have a lot of interaction with them,’ comments
Maureen Wolff-Reid, president and partner at Sharon Merrill Associates, an
investor relations consultancy. ‘Board members are much more visible now.
They’re on the corporate website; they may be on LinkedIn. Before, you might
have had to send a snail mail letter to reach them. Now you know where they
work and you can pick up the phone and call them at their place of
business.’ Nor are shareholders shy about approaching directors and voicing
their concerns, even in informal situations like cocktail parties.
Wolff-Reid believes implementing a board-shareholder communications policy
is one way to calm potential director jitters about planned, or unplanned,
shareholder interactions. The policy she advocates establishes processes for
board-shareholder communications and ‘a method of flagging’ inbound
shareholder inquiries that should rise to board level. For example, the
policy might require that all inquiries enter through investor relations (IR)
or the corporate secretary, who will then send them to directors. This
enables directors to base their responses on an improved understanding of
the investors and the context from which their questions arise.
The communications policy also
identifies the issues that are more appropriate for the board to discuss –
board structure, nominations, executive compensation, CEO evaluation and
succession planning, for example – versus those issues more appropriate for
management, such as product lines, operations and financial results. ‘A
board would typically defer all operating and financial performance
questions to the senior executive team,’ comments Wendy Webb, a board member
at Jack in the Box who serves as chairman of the firm’s nominating and
governance committees and as a member of its finance committee.
Webb, who formerly headed IR at the Walt Disney Company and Ticketmaster
Entertainment, says shareholder communications directly from the board
‘should be a carefully considered process and one developed through
consensus.’ Because board communications are at such a high and sensitive
level, Webb believes they should be carefully coordinated and orchestrated.
‘Rogue board member communications may not serve the best interests of the
firm’s shareholders,’ she explains.
Meeting in the middle
Directors’ preparation for meeting investors typically includes regular
shareholder updates from the IR department, working out techniques for
setting a meeting agenda and managing expectations, gathering information
about what other companies are doing, and Reg FD training. Fear of breaching
Reg FD is the biggest perceived stumbling block to board-shareholder
dialogue – but it doesn’t have to be. The best way to avoid running afoul of
Reg FD is to focus on governance matters under the board’s purview.
‘Day-to-day operating questions and financial performance questions, among
others, should all be addressed by the company because it will be the expert
in Reg FD and the levels of disclosure the firm has already had,’ adds Webb,
who is also managing director at Tennenbaum Capital Partners. ‘Of course, if
there are matters that need specific attention directly from the board, it
should embrace its role and careful and thoughtful interaction should take
place, as needed, to best serve shareholders.’
Webb says questions about CEO compensation, nominating decisions, the skill
sets the board was looking for in adding to its ranks, and possibly some
audit committee oversight questions might also be appropriately addressed by
board members.
‘Companies struggle with Reg FD but get to a point where they can have
productive meetings,’ explains Quick. He cites compensation disclosure in
the proxy statement as appropriate material for board-shareholder dialogue
because compensation discussion and analysis disclosure ‘does not bear in a
material way on an investment in a company’s stock.’ He also says it’s a
good idea for the company’s IR officer to be present at the meetings to
‘raise the red flag’ if the dialogue starts moving into forbidden waters.
As the currents of change continue to shift toward heightened recognition of
shareholder rights, more board-shareholder first encounters are inevitably
going to occur. Increasing say-on-pay votes, new mandated disclosures with
regard to board qualifications and potential SEC-mandated proxy access are
all guiding companies to chart that course. ‘All those things, I think,
point to companies and directors wanting to communicate in new and better
ways with shareholders,’ concludes Deane.
