Posted by Scott Hirst, co-editor, HLS Forum
on Corporate Governance and Financial Regulation, on Saturday November
14, 2009 at
1:57 pm
(Editor’s Note: This post comes to
us from
Simon Wong of
Northwestern University Law School.)
Shareholders around the world are seeking
greater dialogue with boards of directors of investee companies on an
expanding array of topics. For example, demands by investors in the US
and other markets for greater shareholder rights – such as an advisory
vote on remuneration – are in part efforts to engage the board on
important governance issues. In a recent article, available
here, I draw upon my experience in the UK and other markets to offer
practical suggestions to boards on improving engagement with their
shareholders.
To start, boards should strive to build a
long-term, trust-based relationship with their most significant
shareholders. In practice, this means that the board – particularly the
chairman, lead independent director and remuneration committee chair –
should interact directly with shareholders rather than delegating this
function to the investor relations team.
The focus on building trust means that
regular meetings are important, as relationships and goodwill are built
through repeated encounters. Meetings with shareholders do not have to
be especially formal. In most situations, casual conversation often
works better. Quality of discussion, particularly when sensitive topics
are on the agenda, is often inversely proportional to the number of
people in the room. As a principle, both sides should strive to minimize
the number of attendees.
In their interactions with shareholders,
boards need to be careful about the impressions they create. Perceptions
of arrogance or disdain for shareholders can haunt a company a long
time. In the UK, a few companies face heightened suspicion and scrutiny
from their shareholders due to real and perceived slights that occurred
years earlier.
While boards may be concerned about
appearing less than perfect, shareholders do not expect them to be
infallible. In fact, owning up to mistakes can help disarm even the
angriest investors. By contrast, Chairmen and CEOs seeking to
demonstrate their infallibility – believing this will win over investors
– are likely to arouse suspicions and intensify existing concerns.
Furthermore, divergent viewpoints among directors are not necessarily
problematic, as long as they do not reflect a dysfunctional board, and
they can even provide comfort to investors that the board is rigorous
and serious.
Correspondingly, shareholders must play
their part by gaining a good understanding of the company, acknowledging
the challenges involved in running a listed firm, adopting a principled
but pragmatic approach to corporate governance, and, most importantly,
demonstrating an ability to keep confidences.
Boards that respond with openness and
understanding can realize substantial benefits, including greater
flexibility in structuring their boards, less angst about remuneration,
and greater acceptance of other governance-related arrangements
(including deviation from established best practices). Better
communication will also underpin investor support in turbulent times,
not least when activist shareholders agitate for change.
Simon Wong is head of Corporate Governance in the London office of
Barclays Global Investors and an Adjunct Professor of Law at
Northwestern University Law School
