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The article below was published in Agenda, a Financial Times private subscription service for corporate directors, and is presented with permission.

Note: David Silverman, managing director of Blue Harbour Group and quoted below on the subject of long-term investor interests, is a member of the Forum's Program Panel for "E-Meetings."


Source: FT Agenda, October 18, 2010 article

The week's news from other boardrooms




Article published on October 18, 2010

As companies approach the 2011 proxy season, they are rethinking the way they reach out to investors and how that communication can be more useful to both parties.

Next proxy season will stand apart in terms of investor communications due to new items on the ballot as a result of demands from the SEC and Congress, including say on pay. And even though proxy access has been delayed, experts say good investor relations should be exercised now to lay the groundwork for when and if access is granted.

“[The] list of topics will be longer and will have evolved,” says Paul Washington, the corporate secretary at Time Warner. “We’ve talked about say on pay in the past, but now we’re talking about [how often to have] say on pay [votes].”

Another issue for the upcoming proxy season will be getting investors’ thoughts on these new items while many of them are still formulating their policy positions. “What’s challenging this year is we’re all thinking through this at the same time,” Washington says.

Experts say boards have a large role to play in monitoring how companies approach investor relations in this new era of governance.

“We’re finding, as boards begin to understand more about how the environment is changing, they are taking more of an interest in how the company is responsive to different elements of the investor universe,” says Lissa Perlman, a partner at Kekst & Co., a consultancy firm on strategic communications for senior management and the board. That doesn’t mean they are actively engaged in speaking to investors, she adds, but boards do want to know more about who the company’s investors are and how those relationships are being managed.

A survey conducted in August by the Shareholder Forum on e-meetings, which is chaired by investment banker Gary Lutin, indicates that the preferred method among institutional investors for obtaining information to vote their proxies is to ask direct questions of management, followed by reading viewpoints of dissident investors, meeting with management and presenting questions to dissidents.

Furthermore, investors said they would spend the most time evaluating proxy voting decisions for a merger proposal or if there was a contested board election. Decisions on say on pay and approval of a stock plan for management compensation were given slightly less priority.

Like many large companies, Washington says, Time Warner has a good process in place for reaching out to major investors on governance issues. The corporate secretary’s office will meet with its 50 largest investors during the proxy season and slightly fewer investors during the rest of the year, he says. Sometimes these meetings will involve a representative of the investor relations department.

But not all companies have coordinated efforts between the IR and general counsel/corporate secretary’s offices. Experts say that as companies enter a new stage of investor communications, a key component will be collaboration between these two departments.

If the functions are highly segmented, “it can lead to misunderstandings,” Washington says. For example, if the investor relations officer (IRO) is on the line with a portfolio manager that has questions about corporate governance, it helps to have the corporate secretary’s input. Likewise, corporate secretaries can sometimes find themselves speaking to investors that have questions about price-to-earnings ratios or dividend policies that the IRO is uniquely positioned to answer.

Bridging the Gap

The segmentation between the IRO and the corporate secretary originates from the different types of investors to whom each department is speaking.

Corporate secretaries often talk to activist pension funds, naturally, but also to the non-activist staff at mainstream mutual funds who conduct the research and actual voting of the proxies. IROs, on the other hand, deal mostly with the buy- and sell-side analysts and the portfolio managers at funds — in other words, the investors who are responsible for picking and selling stocks.

Some investors and corporate managers say there are ways companies can help bridge the gap between these two types of investors. In addition to more coordinated efforts between the corporate secretary and IR department, companies could also find forums to draw both types of investors together.

If you’re sitting in the board of directors seat and you want somebody who is the portfolio manager to be making a governance-oriented decision, then you have to make information available in a forum where that investor will be able to easily consume that,” says David Silverman, a managing director of Blue Harbour Group, an investment fund that takes large and active positions in a concentrated number of companies. One example could be discussing governance issues at the annual investor analyst day or during a quarterly earnings call. “If you want the same person analyzing quarterly earnings to also think about governance, then you have to provide them with that information [and] you need to explain how a governance decision relates to the financial performance,” he says.

“If a company thinks effective corporate governance is a competitive advantage for them, it’s to their advantage to mention it,” Washington adds. By conveying their corporate governance strategies to all types of investors, companies have an opportunity to gain the type of long-term shareholders they desire, Silverman says.

Developing a strategy for communicating with investors can be designed with another added benefit: mitigating the role that proxy advisory firms play in proxy voting outcomes. For many large companies these firms have substantial influence on 30% or more of their shares, Washington says.

While it would be ideal if smaller institutional investors did not follow proxy advisory firms’ recommendations so closely, that’s not likely to happen. The problem is that having an in-house research staff to evaluate every proxy ballot is too expensive for many midsize investment funds.

But companies can help curb the influence of these services by taking a more proactive approach to their communications strategy with investors, experts say.



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