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Note: Margaret M. (Peggy) Foran, quoted in the article below, is a member of the Shareholder Forum's Policy Advisory Board  and of the Program Panel guiding the Forum's establishment of marketplace standards for "Fair Investor Access."


Source: Wall Street Journal, January 8, 2013 article


CFO JOURNAL   |   Updated January 7, 2013, 6:47 p.m. ET

Boards Cozy Up to Investors

Once-Resistant Directors Spend Time With Shareholders to Defend Policies


Corporate boards are being pulled into a job they have long resisted: investor relations.

More companies are relying on directors to defend corporate policies or explain their thinking on touchy issues such as executive pay. Partly as a result, major shareholders are coming to expect more face time with board members, with whom they previously had few communications.

"For a long time, boards felt insulated from shareholders," said Michelle Edkins, head of the global corporate-governance group at money manager BlackRock Inc."They felt it was the job of management to deal with shareholder concerns. But there's a growing realization that directors are accountable to shareholders, so [they] need to understand what shareholders think."

"There's absolutely more contact between boards and shareholders," said Ed Knight, general counsel for stock-exchange operator Nasdaq OMX Group Inc. "The say-on-pay development was a catalyst in what has become a long-term trend, and what will become best practice for companies."

Say-on-pay rules, mandated by the 2010 Dodd-Frank financial law, let a company's shareholders weigh in on executive pay through a nonbinding vote. Data from proxy-advisory firm Institutional Shareholder Services show that shareholders are increasingly likely to challenge executive pay packages they consider too generous or at odds with their own interests.

In 2012, a majority of shareholders voted against executive pay packages at 2.2% of the companies that held say-on-pay votes. That's up from 1.3% in 2011, the first full year such votes were held.

While companies aren't obliged to reconsider pay practices if they lose such a vote or get only weak support, some, including Citigroup Inc., Occidental Petroleum Corp. and Allstate Corp., have done so. Many companies also have increased their board's outreach to shareholders.

Corporate-governance experts say most companies hope for at least 70% support in say-on-pay votes. After Allstate was backed by a relatively low 57% in 2011, the insurer responded with its first-ever letter from the board to its shareholders in that year's annual report. The letter outlined steps Allstate was taking to address shareholder concerns. Allstate's approval rate climbed to 92.3% in last year's vote.

Allstate declined to comment on its board's outreach efforts.

Some investors say they are starting to expect to hear from directors, particularly if they have concerns about issues such as pay. "It's an absolute red flag," when directors are reluctant to talk with shareholders, said Stephen Brown, who runs the corporate-governance group at benefits manager TIAA-CREF.

But contact between boards and shareholders remains relatively rare. According to a 2011 survey by nonprofit research group the Conference Board, Nasdaq OMX and NYSE Euronext, roughly 25% of 334 companies surveyed in 2011 had adopted a set of rules for boards to follow in communicating with shareholders. "For most companies, attendance of the annual meeting of shareholders is the only form of investor engagement required of board members," the report said.

Peter Browning, who runs a board advisory firm and serves on the boards of Nucor Corp., Lowe's Cos., Enpro Industries Inc and Acuity Brands Inc., said none of those companies have had their directors meet with investors. The CEO typically is a company's public face, and directors don't want to risk muddying the CEO's message, he said.

Indeed, most companies communicate with their shareholders through the CEO, chief financial officer or investor-relations staff, if only to avoid board members inadvertently disclosing nonpublic information, he said. "You don't want mixed messages in the marketplace."

Directors also don't want to give the wrong impression about their role by talking strategy with shareholders, said ISS President Gary Retelny. "There is still some apprehension by directors who don't want to get in the middle of what management is doing. They don't want to be perceived as operators."

Despite such concerns, Mr. Retelny said ISS, which met with roughly 300 companies last year, has had directors attend some of the meetings. "It's a very small percentage, but there's no doubt it's increasing," he said.

Prudential Financial Inc. has issued a board letter to shareholders every year since 2010. Peggy Foran, its chief governance officer, said outreach efforts by the company, including the letter and meetings between directors and shareholders, helped Prudential management increase its "yes" votes on say on pay to 95.88% last year from 86.5% in 2011. "It's good business judgment to get the thoughts of institutional investors," she said.

Some companies see the value of keeping shareholders in touch with their boards, but prefer to have management mediate the exchange. Coca-Cola Co. uses its director of corporate governance, Mark Preisinger, to solicit comment from shareholders and give the board their feedback.

"Our directors are available for direct engagement with shareowners and have done so," said Mr. Preisinger, in an email. "What we have found most effective for our shareowners and most efficient for the board is a management-driven model. A member of management works as a dedicated contact with shareowners on behalf of the board on governance, environmental and social issues."

A version of this article appeared Jan. 8, 2013, on page B7 in some U.S. editions of The Wall Street Journal, with the headline: Boards Cozy Up to Investors.

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