How to Build Trust Between Corporate Boards and Shareholders

Catherine Dunn

Corporate Counsel | January 4, 2012

Ira Millstein

Holly Gregory

To the list of New Year’s resolutions for the first weeks of 2012, here’s one for corporate boards: Take action to repair relationships with your investors.

So say Weil, Gotshal & Manges’ corporate governance gurus, senior partner Ira Millstein and partner Holly Gregory, who co-wrote a client alert just in time for the upcoming proxy season, “Rebuilding Trust: The Corporate Governance Opportunity for 2012” [PDF].

For starters, says Millstein, “business in general came out of the recession with a black eye.” Concerns about the wielding of corporate power that began, largely, with turmoil in the financial sector have had a spillover effect across industries. The authors say that “tough economic conditions, slow job growth, political dysfunction, and general uncertainties about the future” have all taken a heavy toll on investor confidence and public trust.

“We felt that it was important for all corporations—not just the financial sector—to think about building trust,” says Millstein.

One way to do that is to focus on long-term planning for the company and articulate the accompanying strategies. “This requires effective disclosure of board decisions and policies, and concerted efforts at shareholder relations and communications, both areas where boards often could focus more attention,” according to the paper.

The paper stresses the value of communication between boards and shareholders throughout. “We think that’s the single most important thing for corporate boards to be thinking about,” says Millstein.

When handling the “hot-button” issues of the day, too—majority voting, proxy access, and “vote no” campaigns recommended by proxy advisory services—good communication with investors is more effective than “warfare” between the board and investors, says Millstein.

He suggests that boards not only find out what their shareholders think of those issues, but also explain to investors why the board is making a certain decision.

“Communication has largely been a one-way street so far,” says Millstein, “with shareholders coming in and communicating loudly when they don’t think something’s right, and boards communicating only when they go on a road show. And that’s not the time for communication. The time for communication is when nothing bad is happening.”

General counsel and corporate secretaries can help by providing boards and management with a window into the corporate governance community. “I believe that general counsel and corporate secretaries have a burden and a duty to keep the board advised on what’s going on out in the world,” Millstein says. “What’s the sense of the shareholders? What’s the sense of the community at large? Boards, who meet maybe six to 10 times a year at most, don’t have the time, and I don’t think have the inclination, to read all of this governance material that’s coming through the pipe these days.”

The first stop en route to the board should be a conversation with the chief executive, says Millstein, who adds that he would never suggest bypassing the CEO. “Ordinarily, you and the CEO should have a really good, close, trusting relationship,” he says.

So if there is something that a general counsel thinks the board should know about, “the first thing to do is to communicate with your CEO,” Millstein says. Having had that talk, the chief executive should then be the one to say, “Put it on the agenda and explain it to them.”