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The article below was published in Agenda, a Financial Times private subscription service for corporate directors, and is presented with permission.


Agenda, June 7, 2010 article


The week's news from other boardrooms





Article published on June 7, 2010
By Kristin Gribben


In an age of intense shareholder activism, boards can run the risk of getting a skewed view of shareholders’ perspectives on their companies. If all they hear are the voices of activists, how do they know what the broader base thinks?

Soliciting the feedback of all investors could cause boards to be more informed on how well management conveys its strategic plans and provide an outside view for evaluating the strategy itself.

“It gives [board members] pause and second thoughts that maybe we are headed in the wrong direction here. At Darden, keeping the board informed has helped guide strategy,” says Matthew Stroud, vice president of investor relations for Darden Restaurants.

British Airways has a solution that’s seemingly unique. At the recent British Airways investor day, held May 21, hundreds of sell-side analysts and portfolio managers mingled with an unlikely group of attendees: outside board members. In fact, the board of British Airways has been attending the annual investor confab for many years.

“Our entire board attends the annual investor day where possible in order to demonstrate its support for management and to have the opportunity to meet investors and hear their views firsthand,” says a British Airways spokeswoman. “We also offer those analysts the opportunity to have one-to-one sessions with a couple of non-executive directors to discuss governance as part of the day.”

Over the years, director attendance at annual shareholder meetings has increased, but involvement in analyst and investor events is still very rare, experts say, because it’s not seen as the traditional role of a board to get involved. When board members do talk to investors, it tends to be with activist union and pension funds that are interested in issues of corporate governance, over which boards have direct control. Wall Street investors, on the other hand, are interested in dividend payouts, price-to-earnings ratios and corporate strategy — all topics the board is familiar with but usually doesn’t have intimate knowledge of.

But experts say boards should be getting regular information about the views of their companies from Wall Street and mainstream mutual funds to moderate the concerns they are hearing from activists, who often represent a small percentage of a company’s stock ownership.

“It keeps you from veering off one way too much,” said Paul Washington, Time Warner’s corporate secretary, during an NYSE-sponsored webcast earlier this year. “Besides analyst reports, the board listening in on our earnings calls with analysts, attending investor days if you hold them — those are great ways to make sure that your board isn’t insulated from your investors, and you don’t want to do that,” he added.

The most common way for the board to receive information about what investors are thinking of the company and its strategy is through regular communication with the investor relations department.

That’s what happens at Darden Restaurants, the operator of popular eateries like Red Lobster and Olive Garden, where Stroud puts together quarterly written reports to the board and also gives in-person presentations during regularly scheduled board meetings.

Such interaction doesn’t always go as far as it does at Darden. Brinker International, also in the restaurant business, sends the board quarterly updates on top investors from Thomson Reuters, but the investor relations officer is not attending regular board meetings, according to Marie Perry, vice president of investor relations at the company.

That’s not the best approach, says Lou Thompson, managing director at consulting firm Kalorama Partners and former president of the National Investor Relations Institute (NIRI).

“The board of directors needs to hear from the IR person [about whether analysts and investors] understand the strategy, what do they say about the company, and so on,” he says.

Oftentimes the CFO, to whom the investor relations officer (IRO) usually reports, wants to present the investor relations material to the board. That can sometimes be a mistake, experts say. Ultimately, of course, it’s up to the board to make sure they are getting the right amount of information from the right individuals. “It just depends on how active the CFO is,” Stroud says. “If you have a CFO who is somewhat disengaged from the operations, then the IRO needs to report to the board on a regular basis.”

One approach some boards will take is to invite a portfolio manager or a sell-side analyst who covers the company to attend a dinner with the board, with or without management present, says Keith Mabee, vice chairman at the communications firm Dix & Eaton.

Thompson says beyond the IRO presenting to the board, the company should gather data from an outside firm on the opinions of investors and send that information to the board.

“A number of companies should go out at least every other year and do that independent measurement,” Thompson says. “[M]any companies do, but not everyone does.”




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