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Source: The Harvard Law School Forum on Corporate Governance and Financial Regulation, July 8, 2012 posting

Advancing Board-Shareholder Engagement

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday July 8, 2012 at 9:14 am

Editor’s Note: The following post comes to us from Mark Watson, partner at Tapestry Networks, and is based on the introduction of a Tapestry paper by Anthony Goodman and Tom Woodard. The full paper is available here.

On April 26, 2012, representatives of four large, North American institutional investors met with five experienced non-executive directors of major, global corporations to explore the important topic of how corporate boards and their members should appropriately engage with shareholders. This topic has attracted great interest in recent years, triggering a fair amount of animated discussion, particularly so in the wake of the 2000–2001 corporate scandals (e.g., Enron and WorldCom) and the 2008 financial crisis.

Indeed, before and after the financial crisis, Tapestry’s corporate governance networks have discussed their responsibility to investors and met with major investing institutions in the United States, Canada, and Europe and experts, advocates, and other participants in the field of board-shareholder engagement in an attempt to determine a way forward that works for all constituencies. Shareholders, lawmakers, board leaders, and corporate governance activists have all expressed views, and they are not always in agreement. Many of the issues are laid out in a Tapestry-prepared white paper, “A Key Moment to Improve Board-shareholder Engagement,” that was shared in advance with meeting participants.

Directors and investors agree the time for enhanced dialogue is at hand. As one director remarked at the April meeting:

“Investor engagement is the new frontier for boards … I have always been frustrated with the lack of communication that directors have with investors. That is changing, and we have begun a journey that will get better with more engagement.” An investor told Tapestry, “This is an important time for investors. We cannot afford to veer off course on marginal issues. If the corporate world is able to say, ‘We knew you couldn’t handle the responsibility. You blew the opportunity and proved you are simply the stooge of special interests,’ then we have missed a critical moment.”

While this paper addresses discussions with large institutional investors, the themes expressed also raise questions of how boards should be engaging with all investors.

Participants at the April 26 meeting discussed the following themes, which are discussed in more detail in the full paper.

»  The current paradigm of board-shareholder engagement fails both boards and shareholders. Investors elect board directors to represent them. Board directors hire management to run the company. Yet in the United States, rather than interacting with directors, investors generally interact with management. Directors are rarely involved except in a crisis. Policymakers, regulators, and some institutional investors want to see more engagement between investors and boards. Many non-executive directors believe that more engagement with long-term institutional investors in particular is inevitable. While there have been examples of successful engagement, and even collaboration, between boards and investors, both groups increasingly acknowledge that current practice often seems rote and reactive, and recognize that the default relationship between boards and investors is unnecessarily adversarial.

»  Several real and perceived challenges stand in the way of progress. Among the significant obstacles to board-investor engagement, meeting participants cited resource constraints, worries about director liability under Regulation Fair Disclosure, the potential for regulatory change compelling investors to “become more activist” in Europe to translate to the US, and board and management wariness toward greater engagement.

»  Productive engagement requires a new mind-set, new practices, and new protocols. Participants said board directors and members of management need a new mind-set, one that acknowledges the value of greater engagement between directors and investors. Boards and investors should agree to a set of principles for engagement, including more proactive, direct communication and less reliance on intermediaries, such as proxy advisory firms. Participants also outlined a set of engagement practices including conference calls between directors and investors, a shareholder meeting day, and regular, informal meetings between boards and their major investors.

The full paper is available here.


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