Should directors engage
Policies should be made public through proxy statements and websites.
Large investors are expressing interest in talking to corporate boards with
an intensity that has seldom, if ever, been seen before. At the same time,
there is little precedent to prepare directors to address such challenges.
The emerging prominence of boards presents a stark departure from the
traditional corporate culture in which boards were often seen to be part of
the CEO’s team rather than the body that held him or her accountable.
And it has always been the CEO and other members of the executive team who
have provided investors with perspective on the company, not the board. Now,
an evolution of the relationship between directors and investors is under
way. And it is appropriate – if one of the board’s fundamental purposes is
to represent the interests of shareholders, it would appear that part of its
obligation is to be transparent to those shareholders.
This new level of interchange is equally appropriate from the shareholder
side. John Wilcox, chairman of international consultancy Sodali, observes:
‘When the shareholders elect directors, they’re supposed to be making an
informed decision – but how can they if there’s no communication? Investors’
own commitment to act responsibly requires this dialogue.’
The trend toward greater communication between boards and investors is, in
part, being fostered by new regulation. Dodd-Frank rules now enable
non-binding say-on-pay votes, forcing boards to consider investors’ opinions
on executive compensation. In the past, there was no reason for those views
to enter the boardroom.
The notion of shared responsibility for good governance among boards and
investors has taken shape in the UK with an investors’ Stewardship Code. It
constitutes an agreement among investors to promote good governance in
direct interaction with companies, particularly in areas too subtle for
regulation, such as corporate culture, risk assessment and allocation of
The reasons behind these changes are not hard to discern. It is no
coincidence that investors’ interest in engaging board members has followed
the financial meltdown. The 2008 crisis raised enormous questions about
governance, not only among financial institutions but throughout the entire
corporate sector. Over the last decade, increased interest in corporate
impact on the environment and workers’ rights has attracted additional
attention to the principles that underlie corporate strategy and action.
For these and other reasons, governance has grown in investors’ minds as a
risk factor. As part of this evolution, the points of interaction investment
companies present to corporations are no longer confined to portfolio
managers and equity analysts. Increasingly, they include governance
professionals who make decisions on investors’ proxy voting. This can have
far-reaching ramifications for any company.
But why would any director want to submit himself or herself to the scrutiny
of investors? Is it a path to anything but increased criticism and
In fact, directors can find success in addressing the demand for greater
engagement by coming to understand why investors find such conversations of
interest – and the contexts in which they are appropriate.
Rules of engagement
There is no reason for a board to engage with investors other than to
address subjects that lie in the board’s domain rather than the executive’s.
Conversations with investors should therefore be restricted to the process
of governance. While this may seem limiting, there is in fact little of
interest to investors that the process of governance does not touch.
Perhaps most obvious is the subject of executive compensation. Investors
know, for example, that many CEOs have been incentivized to assume outsized
risks – a factor which may become evident only after the boss has departed.
Is a CEO’s pay calibrated to earnings per share growth (a short-term
measure) or to return on capital (considered to have a longer-term
orientation)? You can’t really talk to the CEO about this – it has to be the
board. And it is an issue that has everything to do with the company’s
Nor can you speak to the CEO about a plan for his or her successor. That is
a subject for the board, and even then, it is a matter of considerable
delicacy. Directors are not obligated to discuss likely names, particularly
in view of the possible effect on individuals in the company who consider
themselves contenders. But directors are in a position to reassure investors
that there is a rigorous process in place that will access the right talent
at the right time.
The relevance of any subject to the governance process is the primary
determinant of whether it is appropriate for discussion. Confining the
discussion to process offers directors their primary source of protection in
conversations with investors. Comprehensive training is therefore essential.
Yet preparing directors for such engagement has less to do with ‘coaching’
(though that’s a must) than it does with the ways in which governance is
carried out at the company generally.
This means that the company must have processes of good governance in place
and must adequately describe its policies through proxy materials and its
website. ‘This creates an umbrella of publicly available information,’ says
Catherine Dixon, a partner at law firm Weil Gotshal & Manges. ‘It enables
you to talk about anything that is already fully and fairly disclosed.’
Many board members’ biggest concern lies in the fear of violating Regulation
Fair Disclosure (Reg FD) rules by inadvertently revealing information to
parties present in a meeting that, under SEC rules, should be disclosed to
the entire market at once. Sticking to process – rather than strategy, or
even the most innocuous references to future performance – will generally
protect directors against Reg FD vulnerabilities.
Another protection is the presence of corporate counsel who can guide the
conversation when necessary and, in the worst case, issue a press release
containing any mistakenly disclosed information to bring the company back
into compliance with Reg FD.
Common sense in approaching an investor meeting means requiring investors to
submit their agenda ahead of time, along with the names and functions of the
individuals who will be present. Are they from the proxy side of the
institution, the investment side, or both? Requiring submission of the
agenda also enables the board to prepare content and to decide which of its
members are most appropriate for the meeting.
Helping investors understand the company’s governance processes represents
no more than half the value the board can derive from the meeting. Listening
to investors constitutes the rest. Investors are under no disclosure
restrictions with regard to saying how they feel about the company, how they
value it, and even how they regard it personally. What the board can learn
from listening to such opinions is unpredictable, but often invaluable.
Also invaluable are the other benefits that can accrue from such personal
interaction. Carolyn Brancato of the Conference Board says, ‘Engaging with
investors may be one of the best ways to soften situations that might
otherwise end up as undesired proxy proposals or lawsuits.’
Cross Border Ltd. 1995–2012.