A version of this post previously appeared in IR Magazine.
Shareholder-director communication has become an increasingly critical part of both normal course and contentious investor relations. As the 2016 proxy season comes to a close, more and more companies are realizing it’s risky for boards to wait until there is a shareholder issue before developing a director-shareholder communications strategy. Indeed, Securities Exchange Commission (SEC) Chair Mary Jo White highlighted the importance of shareholder-director engagement by saying, “the board of directors is – or ought to be – a central player in shareholder engagement.”
The proposed benefits of director-shareholder communication are twofold:
Despite the rising trend in this area, many directors are passionately against the idea of engaging directly with shareholders. I’ve heard a variety of concerns in recent conversations with directors. Some are afraid of violating Regulation Fair Disclosure. Some directors adamantly assert that “investor relations is not the board’s job.” These directors emphasize that IR is the responsibility of the company’s management team and investor relations officer,whose job it is to relay all relevant shareholder insights back to the board for consideration within the board’s agenda.
Directors also correctly point out that the board should not say anything out of step with management anyway, so they question the value of this effort, especially given limited available time that directors can devote. Moreover, some CEOs cringe at the idea of their directors having direct contact with investors. There is also the problem of unfair access: large institutional investors would realistically be prioritized over smaller ones, never mind retail investors.
Digging deeper, most directors agree (though some reluctantly) there are circumstances that warrant board involvement in investor meetings. If CEO-compensation is under fire, the board chairman or head of the compensation committee may need to engage to explain the philosophy behind the compensation program. If the CEO is personally under fire, the board chairman or lead independent director is typically the most relevant person to provide explanation and reassurance of the board’s confidence in leadership. If long-term strategy or capital allocation is in question, a member of the board can be helpful in explaining the company’s planning process.
Testimony from directors that have engaged with shareholders reveals there are additional circumstances when engagement makes sense. Some boards invite shareholders to visit the boardroom to offer their views and opinions on strategic and governance issues. In these instances, only the board is allowed to ask questions, creating a one-way exchange of information rather than a true two-way discussion. Boards that have participated in this type of input from shareholders say it provides greater insight regarding investor views, and sometimes yields good ideas they hadn’t considered. These boards also believe there is a benefit to creating a safe forum for investors to feel heard. “Sometimes people just want to be heard,” one director recently remarked.
Boards that have arranged for more two-way director-shareholder conversations also attest to the benefits. The general counsel of a midcap company recently remarked, “Taking smart directors on the road works. There is a view among some shareholders that directors do not add value, so investors are pleasantly surprised when they meet with board members and find compelling philosophy and thinking around governance topics and constructive views on strategic matters. Similarly, directors are surprised to hear thoughtful, fair and prudent perspectives from shareholders, when they might otherwise expect certain investors to not be genuinely focused on creating long-term value.”
Companies that have successfully arranged for directors to meet shareholders offer important recommendations:
Director-shareholder engagement may not be advisable for every board for a number of legitimate reasons. But there is no question it is an emerging practice. Those who have engaged say it is worthwhile and can be a powerful strategy to strengthen shareholder relationships in an age of increasing investor activism.
Lex Suvanto, global managing director, Financial Communications and Special Situations.