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The Harvard Law School Forum on Corporate Governance and Financial Regulation, November 14, 2009 posting



Effective Board Engagement with Shareholders

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday November 14, 2009 at 1:57 pm

(Editor’s Note: This post comes to us from Simon Wong of Northwestern University Law School.)

Shareholders around the world are seeking greater dialogue with boards of directors of investee companies on an expanding array of topics. For example, demands by investors in the US and other markets for greater shareholder rights – such as an advisory vote on remuneration – are in part efforts to engage the board on important governance issues. In a recent article, available here, I draw upon my experience in the UK and other markets to offer practical suggestions to boards on improving engagement with their shareholders.

To start, boards should strive to build a long-term, trust-based relationship with their most significant shareholders. In practice, this means that the board – particularly the chairman, lead independent director and remuneration committee chair – should interact directly with shareholders rather than delegating this function to the investor relations team.

The focus on building trust means that regular meetings are important, as relationships and goodwill are built through repeated encounters. Meetings with shareholders do not have to be especially formal. In most situations, casual conversation often works better. Quality of discussion, particularly when sensitive topics are on the agenda, is often inversely proportional to the number of people in the room. As a principle, both sides should strive to minimize the number of attendees.

In their interactions with shareholders, boards need to be careful about the impressions they create. Perceptions of arrogance or disdain for shareholders can haunt a company a long time. In the UK, a few companies face heightened suspicion and scrutiny from their shareholders due to real and perceived slights that occurred years earlier.

While boards may be concerned about appearing less than perfect, shareholders do not expect them to be infallible. In fact, owning up to mistakes can help disarm even the angriest investors. By contrast, Chairmen and CEOs seeking to demonstrate their infallibility – believing this will win over investors – are likely to arouse suspicions and intensify existing concerns. Furthermore, divergent viewpoints among directors are not necessarily problematic, as long as they do not reflect a dysfunctional board, and they can even provide comfort to investors that the board is rigorous and serious.

Correspondingly, shareholders must play their part by gaining a good understanding of the company, acknowledging the challenges involved in running a listed firm, adopting a principled but pragmatic approach to corporate governance, and, most importantly, demonstrating an ability to keep confidences.

Boards that respond with openness and understanding can realize substantial benefits, including greater flexibility in structuring their boards, less angst about remuneration, and greater acceptance of other governance-related arrangements (including deviation from established best practices). Better communication will also underpin investor support in turbulent times, not least when activist shareholders agitate for change.

Simon Wong is head of Corporate Governance in the London office of Barclays Global Investors and an Adjunct Professor of Law at Northwestern University Law School



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