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Source: The Harvard Law School Forum on Corporate Governance and Financial Regulation, September 4, 2012 posting

Board Engagement with Corporate Shareholders

Posted by Jeffrey Stein, King & Spalding LLP, on Tuesday September 4, 2012 at 9:06 am

Editor’s Note: Jeffrey Stein is a partner in the Corporate Practice Group at King & Spalding LLP. This post is based on a report from the Lead Director Network by Mr. Stein, Bill Baxley, and Rob Leclerc, available here.

Historically, there has been little direct dialogue between individual board members and shareholders. This is changing, however, as directors, particularly lead directors, face increasing pressure to meet directly with their companies’ largest shareholders. Accordingly, at many companies, individual directors are beginning to engage with investors on an ongoing basis, and not just in response to a particular issue or crisis.

The Lead Director Network (the “LDN”), a group of lead directors, presiding directors and non-executive chairmen from many of America’s leading companies, met on June 19, 2012 to discuss the relationship between directors and major shareholders. Representatives of two institutional investors also participated in the meeting. Following this meeting, King & Spalding and Tapestry Networks have published a ViewPoints report here to present highlights of the discussion that occurred at the meeting and to stimulate further consideration of this subject.

The following provides highlights from the LDN meeting, as described in the ViewPoints report.

1. The upswing in board-shareholder engagement

LDN members observed that the following factors, among other matters, have contributed to the increase in direct discussions between directors and shareholders:

»  Pressure for corporate performance. Institutional investors are paying more attention to governance issues and governance questions are often triggered by a company’s financial performance. Accordingly, given the difficult economic climate of the past several years, investors have become more vocal in expressing their desire to meet with directors to discuss a company’s performance.

»  Enhanced investor powers. Legal changes (such as say-on-pay votes and changes in broker discretionary voting) along with governance trends (such as the declassification of boards) have markedly increased the powers of investors.

»  The rise of passive investing. There has been a dramatic increase in levels of ownership by indexed investors, and these investors often lack the ability to sell their stock position. Accordingly, these investors often attempt to improve a company’s performance through better governance practices.

»  Desire to disintermediate proxy advisory firms. Direct discussions between directors and shareholders are a potent tool to reduce the influence of proxy advisory firms.

2. Topics for board-shareholder discussion

LDN members noted that directors are particularly well suited to discuss the following three topics:

»  Quality of board dialogue. Conversations with directors provide an opportunity for investors to gauge the quality of the board and its approach to governance. Directors can use this dialogue with investors to convey that the board is engaged and knowledgeable with respect to the issues that are most important to investors.

»  Separation of the roles of CEO and chair. Several LDN members reported having discussions with investors regarding the potential separation of the roles of CEO and chair of the board. These conversations often set investors at ease with respect to a company’s board structure and led investors to drop their proposals to separate the two roles.

»  Executive compensation, performance and succession. Directors are well-positioned to address questions regarding CEO compensation. Directors should generally approach these discussions from a philosophical standpoint regarding how the board thinks about CEO compensation, rather than focusing on specific pay matters. Executive performance and succession may also be subjects for important conversations with investors.

3. Risks of direct engagement

While companies may derive substantial benefits from their directors’ engagement with investors, LDN members suggested that the following may be among the risks associated with direct shareholder dialogue:

»  Risk of breaching Reg FD. In any discussions with shareholders, directors need to be mindful of the disclosure limitations imposed by Reg FD. It may be appropriate to have representatives from the company present during any conversations between directors and shareholders to ensure that the conversation stays within the bounds of what is permitted under Reg FD.

»  Risk of mixed messages. Directors should ensure that they are not communicating different messages than what management has communicated to investors. This can require significant planning and coordination, as different ways of explaining a concept or issue, or different phrasings of a particular matter, run the risk of being viewed as a different message.

4. Effective engagement practices

Participants at the LDN meeting described several practices that they believed increase the efficacy of board and shareholder engagement. Among other matters, directors recommended the following:

»  Understand the investor base. Understanding a company’s shareholder base is critical to having a successful dialogue with shareholders. Many LDN members reported that their boards devote portions of board and committee meetings to learning more about their investors and their concerns.

»  Engage proactively, on a regular basis. LDN members believe that, rather than waiting for the company to face a difficult shareholder vote, directors should engage with shareholders on an ongoing basis. These discussions will lay the groundwork for more effective conversations when the company is being challenged.

»  Have management coordinate investor meetings. Management should coordinate meetings between directors and investors. This coordination will help keep the board informed about investor concerns and also ensure that management is fully aware of the board’s outreach.

»  Set a clear agenda for the meeting. Agendas for investor meetings should be developed carefully. The specificity of the agenda will minimize the likelihood that a director inadvertently discloses material non-public information or otherwise deviates from communicating the desired message.

»  Carefully choose company representatives. The lead director (or non-executive chairman) should be the board’s primary representative to shareholders. The lead director (or non-executive chairman) will typically have the strongest grasp of the people, boardroom dynamics and corporate issues pertinent to any discussion with investors. Some LDN members also suggested that the CEO should attend the investor meeting, unless the reason for the meeting (such as a discussion of CEO compensation) renders the CEO’s presence inappropriate. Other LDN members recommended that other individuals (such as chairs of key committees) were also appropriate participants.

Conclusion. Before the meeting, the views of LDN members on board-shareholder engagement fell across a spectrum, with some eager to engage with investors and others opposed to the idea. While some members continued to question the appropriateness of director dialog with investors, most members’ views shifted over the course of the meeting, with several members seeing significant benefits in carefully constructed conversations with their leading shareholders.


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