Board-shareholder communication has been gaining momentum over the past few years. A PWC analysis earlier this year found that among a sample of 100 S&P companies, directors were involved in as much as 38 percent of recorded company-shareholder engagements.
Yet many directors continue to be averse to shareholder engagement due to concerns about violating regulation FD or inadvertently saying something out-of-step with management. William McNabb, CEO of Vanguard pointed to this disconnect in saying “there’s [still] precious little communication between [boards and shareholders].” McNabb added that in his view, “the best boards work hard to develop ‘self-awareness,’ and seek feedback and perspectives independent of management.”
A group of best practice companies are now publicly praising the benefits of engaging with shareholders. Some company boards are showcasing governance changes they are implementing as a result of the engagement process.
Sam Nunn, Coca Cola’s Lead Independent Director emphasized in his annual shareholder letter: “our Board believes that investors should have line of sight into decisions we make in the boardroom. In my view, to do our jobs as Directors effectively, we need to understand what our owners think.” In 2015, Nunn personally engaged with nearly 20 shareholders, including the company’s largest investors.
Bank of America’s Lead Independent Director Jack Bovender emphasized in his 2015 annual letter: “hearing directly from these shareholders… provides me and the other independent Board members important perspective, which ultimately enhances our effectiveness. He then stated they have “made enhancements to our corporate governance practices that are informed by the feedback from our engagement” with shareholders.
The Board of General Motors recently adopted a Director-Shareholder Engagement Policy that promotes proactive and productive engagement between directors and shareholders. In the company’s 2016 letter to shareholders, Lead Independent Director Theodore Solso pointed out that over the course of 2015 and through 2016, members of GM’s Board have engaged in conversations with investors on matters that are important to them, as well as matters on which GM wishes to share information or seek input.
Several top boards are also showcasing governance changes they made as a result of direct engagement with shareholders.
After a series of engagements with shareholders in 2016, the GE Board adopted term limits for independent directors (15 years with a 2-year transition period for directors as of the 2016 annual meeting). GE also enhanced their proxy disclosures, including around Board and committee focus areas and the Audit Committee’s oversight of the selection of KPMG’s lead audit engagement partner.
Goldman Sachs Lead Independent Director Adebayo O. Ogunlesi stated in a letter to shareholders the company had instituted several governance changes as a result of the board’s engagement with shareholders, including adopting proxy access and changing the structure of their Audit, Compensation and Risk Committees. Ogunlesi explained, “I participated in numerous discussions with our shareholders and a productive dialogue among our Board on the topic of proxy access. As a result, we proactively adopted proxy access, which we believe further bolsters our corporate governance practices.”
BlackRock incorporated feedback from shareholders in 2015 on proxy access policies and practices to inform the management proposal for proxy access included in their 2016 Proxy Statement. CEO Larry Fink explained “Our Board also takes an active role in ensuring best corporate governance practices, and in 2015, incorporated feedback from shareholders on proxy access policies and practices to inform the management proposal for proxy access included in this year’s Proxy Statement.”
Engagement between shareholders and directors is quickly becoming a hallmark of a best-practice board. In a recent article in Pension & Investments, Anthony Goodman and Jack O’Kelley, consultants at Russell Reynolds Associates, emphasized this point in saying “institutional investors assess the willingness of boards to engage with shareholders as a signal of board effectiveness and a strong board culture. Investors want boards to be open to building a relationship that allows for appropriate dialogue with the right pace and timing.”
At a minimum, shareholder engagement is an effective way for board members to learn more about the views of their owners. Done carefully, it can also be an effective way for shareholders to learn more about the long-term potential for a company. What’s clear is that every board should be thinking about shareholder-director engagement as a possible avenue to enhance their ability to maximize valuation.