How, when, and to what degree should board members communicate directly with shareholders? This has become a topic of debate in many boardrooms. The velocity of news stories on shareholder engagement clearly indicates the debate is now out of the boardroom and into the mainstream. While most of the discussion in the press has added to the body of conventional wisdom, it took a determined and diverse group of stakeholders – board members, institutional investors and corporate advisors – to form a task force called the Shareholder-Director Exchange, or SDXâ„¢, to think holistically on shareholder engagement and how it should be implemented. On February 3, 2014, the SDX released a white paper “The Shareholder-Director Exchange: Introduction and Protocol” to the public.
While there are a number of variables to consider in determining how your board should engage with institutional investors, what’s becoming increasingly clear is that every company needs to have an action plan in place. In a recent conversation between Fay Feeney, EVP of The National Association of Corporate Directors Southern California Chapter, and Chad Spitler, Global Chief Operating Officer for BlackRock’s Corporate Governance & Responsible Investment team, Mr. Spitler commented, “As we increase our proactive engagement with companies in the US, we would like companies to recognize that on some issues we prefer to engage with the director or directors whom we have elected to represent us in a particular area of expertise. For example, if we have a significant concern about the CEO’s compensation, then we want to engage with the compensation committee members, not executive management ultimately reporting to the CEO. Are directors aware of this expectation, and are they trained and prepared to engage with us in this way?”
The following are a few practical steps to help formulate an effective process for board-shareholder engagement.
Give some thought to what would elevate the understanding and credibility of your company if directors were involved in the conversation. The SDX paper does a good job outlining the governance-related topics of engagement that fall into the directors’ camp, namely – compensation and leadership, board oversight and capital allocation, executive succession, takeover defenses, and management performance. Board committee chairs are also obviously well-positioned to discuss their roles, responsibilities and agendas. In developing protocol, it’s important to give careful thought to the topics your board members would be qualified to speak about in a way that would build the credibility of your company.
Talking about strategy, operating and financial performance is clearly left in the hands of the CEO, CFO, and other appointed spokespeople who are intimately familiar with the company’s business and day-to-day operations, as well as the nuances of communicating with institutional investors. In collaboration with investor relations, management needs to control the outbound investor messaging and is accountable to the board for the success of investor communications. In certain unique circumstances, such as in an activist campaign or executive management departures, it may be appropriate for board members to speak directly with institutional investors on topics beyond governance. However, we believe that routinely involving board members in investor meetings, analyst/investor day events or conferences is an outlier practice and a potentially risky one.
Put in place a process for coordination and communication between directors, management, and investor relations for board-shareholder interaction. We recommend a collaborative approach to board-shareholder interaction. Investor relations and management should be aware of any inquiries received by the board that do not require confidentiality. The IR team can assist in preparing directors for calls with investors by providing relevant background information on the inquiring firm/investor and a written brief of company information/disclosure that is already in the public domain. A coordinated approach can contribute greatly to consistent outbound messaging for all company spokespersons.
Provide board members with the training and tools needed to increase their confidence in dealing with investors. While some directors already have experience engaging with institutional investors, others need training. A 2013 survey conducted by the National Investor Relations Institute (NIRI) found that 65 percent of the participating companies held Regulation FD/corporate disclosure training for directors on an “as needed” basis and 13 percent delivered this vital training on a one-time only basis. Make certain board members stay fresh on public disclosures by providing them with a frequently updated disclosure brief, mentioned above. Beyond Reg FD, offer some professional training on working with investors to directors who want it. In addition, if you decide that board members will play a supportive role in investor meetings, ensure adequate preparation is provided ahead of any interaction or public appearance.
Remove any filters that inhibit the board from fully understanding outside opinion. Make it easy for your board to get the full picture of outside opinion. Deliver quarterly board reports on IR that provide board members with straight talk on what the Street thinks about the company. Make sure you provide ready access to all sell-side research reports – positive and negative. If you conduct an investor perception study, give board members the option to review the unabridged feedback in addition to the top-line summary. Last but not least, give your board direct access to your investor relations officer or IR consultant who is on the front line daily, talking to key shareholders and analysts. They will be in a position to provide insight and information that would be useful for the board to hear firsthand.
In conclusion, board members are being tasked to be transparent with shareholders about relevant aspects of corporate governance. If directors can speak confidently about their roles and responsibilities, they can be a valuable asset in establishing credibility. They can do their jobs more effectively if they know what shareholders are thinking and how best to communicate with them.