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Board views of responsibilities for shareholder engagement


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Note: The recently retired editor of Directors & Boards, James Kristie, predecessor of the author of the article below, had been a member of the panels that guided the Forum's public programs for Fair Investor Access and Electronic Participation in Shareholder Meetings that developed current marketplace practices for shareholder engagement.


Source: Directors and Boards, 2018 First Quarter article (republished online April 16, 2018)

Shareholder Engagement: BlackRock, CalSTRS, among other investors, upping pressure on boards.
By Eve Tahmincioglu

Whether it’s the impact of iPhones on kids or employee retraining, major investors are looking to corporate leaders to do more.

In January, BlackRock’s CEO and Chairman Laurence D. Fink sent a letter to executives at major companies to not only focus on profits but also the social good. The letter addressed a host of issues seen as creating the world’s polarization, including automation’s displacement of workers and the lack of secure retirements among low-income workers.

In particular, Fink singled out boards as the lynchpins in creating strategies around what BlackRock, which manages $1.7 billion of funds, is looking for:

The board’s engagement in developing your long-term strategy is essential because an engaged board and a long-term approach are valuable indicators of a company’s ability to create long-term value for shareholders.

If companies don’t adopt what BlackRock calls “a new model of corporate governance,” Fink said the firm “can choose to sell the securities of a company if we are doubtful about it’s strategic direction or long-term growth.”

Also last month, JANA Partners LLC and the California State Teachers’ Retirement System (CalSTRS), that hold $2 billion worth of Apple shares, sent an open letter to the company warning that it’s most successful product, the iPhone, may be “too much of a good thing” when it comes to children.

The JANA/CalSTRS letter stated:

…even the original designers of the iPhone user interface and Apple’s current chief design officer have publicly worried about the iPhone’s potential for overuse, and there is no good reason why you should not address this issue proactively.

With recommendations for Apple that include creating an expert committee to review the issue and assigning a top executive to monitor the problem and produce yearly reports — the letter blew up on social media and was covered by news outlets around the world. It’s the kind of attention no one in the boardroom wants.

These examples shed light on how crucial it is for directors to listen to shareholders, especially in the “current media environment with heightened public sensitivity,” maintains Gary Lutin, chairman of The Shareholders Forum.

There’s an obvious need for and benefit from communications between shareholders and directors, he adds. “You need to manage engagement and that does not include selective communications; hold them in an open process. Engagement is good. Selective engagement is bad.”

Joseph Fuller, a professor of management practice at Harvard Business School, advocates that directors pay attention to and understand pressing issues, but he doesn’t advocate for direct shareholder communication.

“It’s a good idea for independent directors to speak directly and candidly to management teams, be dutiful about probing management’s response to issues that seem to be gaining some currency as being controversial, or otherwise gaining attention,” he explains.

If, however, the board has concluded that management’s point of view or response on an issue raised by outside parties is insufficient, he continues, the board can raise questions, evaluate the comments, or ask for follow up information. But, he adds, directors “should never just decide to interact with a third party.”

It’s unclear how much interaction Apple’s board had with the two shareholders, JANA and CalSTRS.

An Apple spokeswoman declined to comment for this story and a CalSTRS spokeswoman said the organization would not comment beyond a statement put out with the open letter. In it, CalSTRS’ director of corporate governance, Anne Sheehan, said: “CalSTRS has a long-standing, collaborative relationship with Apple, and we look forward to, and offer support, for their ongoing proactive technological developments which align with our investment priorities to reduce risk and increase the profitability of our portfolio.”

CalSTRS’ director of corporate governance Anne Sheehan told Bloomberg in  January that the organization has been inundated with calls from companies looking to engage more. “Say-on-pay and the growth in shareholder proposals,” she said, “has really driven this increased engagement between companies and investors.”

Directors should expect to see more pressure from shareholders for boards to engage. That was one key takeaway that came out of a series of The Conference Board governance roundtables last year, including a host of organizations such as Institutional Shareholder Services, BlackRock and Vanguard.

According to a report on the meetings, investors “advocate as much shareholder engagement for corporate directors as possible,” and that they are “committed to effective corporate governance policies that stress board accountability, improved shareholder engagement and long-term value creation.”

Engagement can also lead to more understanding on the part of shareholders regarding a company’s compensation decisions, says Mark Reid, global leader, executive compensation consulting, Willis Towers Watson.

On the flip side, he continues, “Many U.S. companies are learning during the engagement process that the largest shareholders have their own voting policies and procedures, and the role of proxy advisors in many of these cases is one where their research in being used as an input rather than the deciding factor in their ultimate vote.”

Overall, Reid says he sees an increase in “engagement occurring between U.S. companies and their institutional investors.”

A recent example is ExxonMobil’s decision to ditch a long-standing moratorium on the oil giant’s directors communicating with investors.

The move, announced in December, came on the heels of the company’s decision “to bow to a shareholder vote calling for it to report on the potential impact of climate policy on its business,” according to Reuters.

Whether it is the environment or iPhones, or other shareholder concerns, directors need to listen even if they think some issues are “absurd” because it’s in the company’s long-term interest, Lutin adds.

The BlackRock letter drives that point home:

Indeed, the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.


© 2018 Directors & Boards. All rights reserved.



This Forum program was open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the purpose of this public Forum's program was to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant was expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated in 2012 in collaboration with The Conference Board and with Thomson Reuters support of communication technologies to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices. The website is being maintained to provide continuing reports of the issues addressed in the program, as summarized in the January 5, 2015 Forum Report of Conclusions.

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