How Well Do You Really Know the
Shareholders You Represent?
A few years back, I was at a non-business cocktail party, chatting
with someone I had just met. It was a great conversation, as I recall,
until I learned that he was a board member of a company in which I
held stock, and I shared that fact with him.
My holdings were small, comparatively, but large enough to be very
relevant to me. This may have been a wonderful opportunity for this
board member to ask some questions of me, get my opinions — you know,
get to know one of the owners. The other parts of our conversation had
been vigorous and interesting.
You can guess what happened, of course. The conversation died out
quickly, and drinks needed refilling. And we didn’t speak again that
night, or any other time.
Fully understanding the desires and goals of shareholders is a key to
good company governance, and in this regard directors at publicly
traded companies can take a lesson or two from their private company
counterparts, especially when it comes to the growing conversations
around environmental, social and governance (ESG) issues.
At our most recent Private Company Governance Summit, held in June in
Washington, D.C., I was struck by several discussions and comments
that made me reflect on whether ESG and shareholder primacy are
necessarily exclusive and contradictory ideas.
During a conference session on shareholder relations, it was pointed
out that in a typical well-governed private company, with a board
composed of a majority of independent directors, the odds are very
high that board members know every shareholder/owner personally, and
that a major shareholder or two serves on the board. Even if there are
too many shareholders to know individually, there is often a mechanism
to allow clear ownership communication with the board through an
owner’s council or other shareholder representatives.
While private company shareholders often want and need regular
dividend distributions, the overall goal of many private companies is
often their own perpetuation, usually to a new generation of owners.
That kind of thinking often leads to short-term sacrifices in return
for long-term gain. (I, of course, exclude many private equity,
venture capital and other pre-IPO types of private companies here.)
At the summit, we also held a group workshop on the board’s role in
ESG and sustainability for the private company, led by senior partners
of Deloitte. It made clear that private companies, especially those
that are family- or employee-owned, have long been at the forefront of
many ESG issues, including their company’s responsibilities to their
employees, communities and customers. As one attendee put it, “it
seems that sustainability and ESG are the new buzzwords for things
we’ve always done.”
I think the two concepts of knowing your shareholders’ goals directly
and intimately, and having a firm concept of the company’s
responsibilities to its various stakeholders, are related for many
private companies and their boards.
How well do public company boards know what their shareholders really
want? The Delaware courts have interpreted the Duty of Loyalty to mean
that directors must act in the interests of shareholders, but those
interests are often interpreted to mean a focus on short-term gain and
return on investment. But is that always the case?
While the last few years have seen an increase in calls for board
members to be more available to shareholders, I’m sure you know more
than a few directors — as I do — who don’t want anything to do with
direct communication with shareholders. Granted, such communications
can be fraught with opportunities for potential regulatory violations
— think the SEC’s “Regulation Fair Disclosure” rule that tries to
curtail selective disclosures to investors, for example. But a lot of
the liability comes from what a board member might disclose to a
shareholder. It doesn’t prevent the board member from listening to and
getting to know the shareholder.
There are so many layers between public company board members and
their average shareholder — the investor relations team, the
institutional investors who represent thousands or millions of small
shareholders, proxy votes and stock analysts. Adding to the
difficulties are poorly attended annual meetings.
But ask yourself this: Do you really know what your shareholders want?
Certain institutional investors are making clear what they expect from
the companies in which they invest the life savings of their own
investors. But does this really represent all, or a preponderance, of
your shareholders’ goals and desires? If you’re not sure of the answer
to this, can you really judge if and how ESG fits the company you
The Duty of Loyalty shouldn’t be to a hypothetical shareholder, of
course, but to actual real live owners of the company, even those you
meet at random cocktail parties.
THE INDEPENDENT VOICE
OF PUBLIC COMPANY GOVERNANCE
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