As shareholders become more vocal, directors are looking for ways to
make sure they feel heard
Seeking to improve frayed relations with shareholders,
a growing number of companies and boards are trying a simple but new
approach: They're giving investors more opportunities to be heard.
"Everybody's trying to figure out the best way to do
all this," says Kenneth Daly, president and chief executive officer of
the National Association of Corporate Directors, a nonprofit Washington
group that provides governance information, research, education and
guidance to boards. "We believe from talking to our members that there
are, in fact, a lot more meetings happening -- face-to-face meetings,
telephone discussions" and other types of dialogue.
Several factors are driving the effort to improve
communication. Recent Securities and Exchange Commission rules requiring
more-detailed disclosure on executive pay have prompted shareholders to
become more vocal. More companies are adopting policies requiring
directors to be elected by a majority instead of a plurality, which,
governance observers say, makes directors more open to dialogue because
they don't want to be embarrassed by not being re-elected. Directors and
executives also want to avoid becoming the target of shareholder
Hye-Won Choi, head of corporate governance at TIAA-CREF,
a financial-services firm serving educational and other nonprofit
employees, says meetings between directors and shareholders should be
routine. "Boards should want to hear directly from the shareholders who
elect them, rather than secondhand through management," says Ms. Choi.
One of her colleagues attended the Pfizer meeting in October.
'Say on Pay'
At the July roundtable that New York-based Pfizer
helped organize, attendees discussed the merits and mechanics of giving
investors a nonbinding advisory vote on executive pay. Such a vote,
dubbed "say on pay," already exists in the United Kingdom and other
countries. At least two U.S. public companies, insurer Aflac Inc.
and telecommunications provider Verizon Communications Inc., have
agreed to give their shareholders a nonbinding vote -- Aflac starting
this year and Verizon starting in 2009.
Much of the discussion at the roundtable concerned the
mechanics of implementing a say-on-pay vote. What exactly would such a
vote mean? What would the language say in the proxy? How would directors
interpret the vote results?
The approximately 130 attendees -- who were invited by
Pfizer and the event's other organizers, Walden Asset Management, an
investment firm known for advocating good governance, and the American
Federation of State, County and Municipal Employees -- also talked more
generally about how to improve communication between shareholders and
companies. "There was a great deal of interest in the room about how to
do that better," says Timothy Smith, director of socially responsive
investing for Walden Asset Management.
One attendee, Stephen Davis, project director at Yale
University's Millstein Center for Corporate Governance and Performance,
agreed to spearhead a research project outlining the best ways for
shareholders and boards to communicate. He says he plans to examine
practices at companies in the U.S. and later abroad, particularly in the
U.K., and plans to present his draft findings on U.S. practices at a
conference next month.
UnitedHealth, based in Minnetonka, Minn., created its
director-nomination advisory committee in 2006 in the wake of fallout
from a stock-options backdating scandal. As part of a broad effort to
improve governance and win back shareholder trust, the company said it
would add at least five independent directors over the next three years.
The company created an advisory committee for investor input on director
"We wanted to include the voice of our shareholders at
a very important juncture in our corporate history," says Thomas
Strickland, UnitedHealth's chief legal officer.
The five-person committee includes four representatives
from large investor groups and one member of the medical community. They
meet with Mr. Strickland and the UnitedHealth director who heads the
nominating committee, Douglas Leatherdale. UnitedHealth isn't disclosing
the names of the investors or medical representative because it says
they have requested anonymity. The committee has met three times so far.
UnitedHealth asked the investors what characteristics
they would seek in a director. The investors discussed hypothetical
profiles of types of people they would like on the board and also
suggested specific candidates. "We want to use them as a sounding
board," Mr. Strickland says. "We're listening more, and we want to be
attuned to what our shareholders have in mind."
Since the committee's inception, UnitedHealth has added
two directors and plans to add a third by May. Robert Darretta, a former
chief financial officer of Johnson & Johnson, was the first director
selected. Mr. Strickland says Mr. Darretta was on a list of suggested
candidates submitted by investors on the advisory committee. As it
happened, he was also on the board's list as well.
"He had the stature and knowledge and background and
reputation with one of the premier players in the health-care space in
the country," says Mr. Strickland. "It was very fortunate to get him."
--Ms. White is a staff reporter in The Wall Street Journal's New York
Write to Erin White at