To whom is the corporation accountable? Before SOX, majority voting, proxy access and “say on pay,” director elections were democratic in name only, and the lines between board and management were blurry at best. Except for the occasional gadfly at an annual meeting, boards rarely communicated with shareholders directly.
Today, after nearly a decade of turmoil in the markets and changes in the regulatory environment, the insulated board is a thing of the past. Shareholders are coming to view directors as leaders whose perspectives may diverge from those of management, who are empowered to exercise independent judgment on matters of consequence, and who are accountable for corporate performance.
A small but growing number of boards, recognizing that investor expectations have changed, have made dialogue with shareholders a formal priority. They are experimenting with new approaches for nurturing this interaction and learning from the experience. Although systematic programs for board-shareholder communications are still atypical in Corporate America, it is not too early to make some observations about what the more successful efforts have in common.
First, nurturing dialogue with investors – as with other corporate stakeholders – requires the establishment of systematic processes for outbound communications with shareholders. At a minimum, companies need to develop a board-shareholder communications policy and method for flagging the inbound shareholder inquiries that should be elevated to the directors themselves. The screening process usually involves two key questions: Does the investor have a significant position in the stock? And, is the matter more appropriate to be handled by the investor relations officer or another member of management?
What kinds of investor concerns are, in fact, appropriate, for board-level response? A blue ribbon commission convened by the National Association of Corporate Directors (NACD) identified several areas as appropriate topics for board-shareholder communications, chief among them CEO evaluation and succession. Another topic is executive compensation, which is not surprising at a time when CEO pay is constantly in the headlines. Other suitable areas identified by NACD are corporate strategy, board structure and director nominations, as well as social, environmental and labor issues.
A number of boards recently have begun meeting personally with proponents of shareholder proposals before they are filed or, once filed, before they come to a vote. Contacts like these provide opportunities to dispute the claims of dissident investors, potentially averting the spread of misinformation as well as personal embarrassment – particularly at the annual meeting.
Today’s forward-thinking boards approach the annual meeting as a serious venue for investor dialogue. A state-of-the-art annual meeting is a well-publicized event held at an accessible location at a convenient time, webcast live on the Internet, and structured in a way that encourages shareholder participation whether in person or online.
Whether the venue is an annual meeting, investor road show or meeting with proponents of a shareholder proposal, the directors who participate need to be prepared. This preparation includes a prior understanding of any underlying issues specific to the company. What are the likely questions, and how should they be answered? This can often depend on the shareholder’s investment style and longevity as an owner of shares. When directors are caught off-guard, the consequences can damage their credibility as well as that of the company.
In practice, learning how to conduct candid and productive face-to-face conversations with shareholders – responding appropriately to their unique psychologies while staying within the confines of Regulation Fair Disclosure – can require considerable training. It also necessitates an understanding of the company’s shareholder base. To help directors stay informed, every pre-meeting board package should include a report on management’s investor relations program, including a detailed analysis of the company’s shareholder base as well as any recent ownership changes, investor feedback and topics of investor interest or concern.
An effective process for encouraging board-shareholder dialogue should include mechanisms for tracking and reporting the resulting communications and their outcomes. A company that is truly committed to this effort will make these reports a regular agenda item for board or governance committee meetings and, thus, a formal element in the board’s annual work plan.
Communicating proactively with shareholders on a regular basis can lead to a variety of positive corporate outcomes. Adding channels for outbound messaging and improving board transparency can strengthen shareholders’ understanding of the company’s governance policies and its strategies for driving growth and profitability. In addition, boards that demonstrate a commitment to open shareholder communication often find that their reputation has been enhanced – not only within the company’s investor base, but more broadly on Wall Street and in the media community.
At a time of heightened demand for accountability, open communication with shareholders enhances the value that service as a director brings to both the corporation and society at large.The alternative is considerably less attractive. Boards that keep investors at arm’s length are risking the independence of their companies and their personal reputations as trusted fiduciaries.
Maureen Wolff
President & Partner
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