Comments on “Talking Governance” Working
August 11, 2008
Jane W. McCahon
Louis M Thompson, Jr.
Kalorama Partners, LLC
We support the overall
direction of the paper – creating an environment for more open communication
between boards and shareholders. We believe that boards greatly benefit
from having a thorough understanding of shareholder sentiment and, in
return, shareholders will have greater confidence in a company where they
feel their views are being heard by the board.
The paper could be
significantly improved if it addressed the role that investor relations
plays in the board-shareholder communications process. To that point, we
are providing Lou’s fourth quarter 2007 Directors & Boards article,
“A board’s template to evaluate the IRO” as an
attachment to our comment paper. It lays out in a checklist format the
things that the IRO can bring to the table – “Are We Getting? Are We
Discussing and Other IRO Assistance”. Under the “Are We Getting”, NIRI
surveys show that about 80% of IROs (“investor relations officer) are
providing this kind of information in written reports to the board.
However, under the “Are We Discussing” section, fewer than 50% are in the
boardroom to discuss these items or their reports. Therein lies the
problem. Too few boards are getting the kind of information they really
need from the IRO in the board room.
IROs’ experience and access to
senior management – much less the board – varies widely. IROs who are well
versed in their company’s corporate governance issues can play an integral
role in providing feedback to the board. In reality, if the IRO can play
this role, in most cases there should be no need for the board to take on
these responsibilities. However, some IROs are too junior to have a true
seat at senior management’s table and have no real exposure to the board.
Some IROs access to major investors is blocked by the CFO and CEO who
eclipse the IRO’s role in meeting with institutional investors.
companies that embrace communication, transparency and great IR, probably
don't need to worry about Board-Shareholder communications, as their current
system works for everyone. It is the companies with poor practices and
behaviors where this will be an issue, but they probably wouldn't consider
proactively -- they wait until it comes to a fight.
The concern in the paper over
the potential for violating Reg. FD in holding these board-shareholder
meetings is way overblown. Also, legal costs should not be a significant
issue when inside counsel or the IRO are generally available to monitor
these meetings, both of whom should know the company’s disclosure record
better than any outside counsel. Should an inadvertent material disclosure
be made, they have 24 hours to publicly release that information. And, with
the SEC’s new guidance on releasing material information over the Internet,
one could fulfill their obligation by putting it on the company’s Web site
and not even deal with the costs of using a release on a news wire.
We have heard, however, that
in a number of companies the IRO may actually reinforce the concern over
violating Reg. FD in meetings between boards and shareholders. We’ve also
found that there are IROs who want nothing to do with the board. They say
it’s risky to be involved with the board. Some say, “I work for senior
management, not the board.” This attitude is most unfortunate.
Secondly, with respect to Reg.
FD, the kind of information that would likely be discussed in these meetings
would be governance-related or comments about the company’s overall
direction or strategy. That’s not what the SEC was focused on in creating
the rule. The concern was over selective disclosure of earnings-related
information. And, all seven enforcement actions, one of which was
overturned on appeal, were about stock price movement on earnings related
information that was discussed by corporate executives with selected
investors. Could there be an FD violation in discussing strategic issues?
Yes, if a director revealed a change in strategic direction or a strategy
that may have not been made public, that would be problematic. This
scenario is unlikely if adequate training has been conducted. If senior
management has done its job, the company’s strategy should have been laid
out in numerous public means and forums.
The paper does little to
address some of the real logistical issues that would be involved in
implementing a program of board/shareholder communications. How
to do it fairly? Which shareholders? Based on size of holding or length of
holding? Shareholder identification on a real-time basis is a problem.
This also leaves out retail investors. The paper recognizes this issue with
a discussion of a hedge fund that may have a much shorter-term focus than
other institutions. As we know, not
all hedge funds are short-term oriented. As Lou suggested in his March 2007
Compliance Week column “Barbarians At the Gate: Do You Open Up?” it
can be a mistake to bar board access to activist hedge funds or other funds
for that matter. At a minimum, the board should consider listening to what
they have to say, and it’s possible they may have something worth
considering. A company should develop criteria for selecting those
investors who want to meet with the board. Not all deserve a meeting with
the board, and the Board clearly has a limited amount of time to devote to
With respect to the retail
shareholders, in some proxy issues, the individual investors have provided
the “swing vote” resulting in a majority voting for a specific proxy
proposal. The paper addressed the situation in which a relatively small
shareholder using the power of the Internet garnered sufficient support
among individual and institutional investors to get Yahoo’s CEO to resign.
Yet, the reality is that boards cannot meet with all individuals who want
direct access. Companies are required to post on their Web sites how
individuals can communicate (in writing) with the board and normally the
corporate secretary or the IRO provides an assimilation of these investor
concerns with a response back to the individual shareholder. As a
practical matter, the number of these communications to the board is
minimal. Most address an issue, not a request to meet with the board.
-- most institutions will not sign a NDA in order to have a conversation
with the board, as they need to be able to trade freely -- yet won't their
expectation be to discuss meaningful corporate matters? "Listen-only mode"
sounds good in theory, but isn't realistic.
Getting the right people to
join the dialog. One of the main points of the paper -- and one that we
agree with -- is that in discussing corporate governance issues there is
often a huge disconnect between money managers and those in the proxy
department. We would even broaden the thought, and thus add another
challenge, is that the same is true on the corporate side -- meaning
sometimes it may be the IRO who speaks to corporate governance issues,
other times it may be the corporate secretary other times the general
Over the years, as CEO of NIRI,
Lou wrote and talked about the role of IR in corporate governance and urged
the IROs to meet with those who actually vote the proxies in the larger
funds that have in-house staff to vote the proxies. He recommended they do
this before the proxy season starts to explain management’s position on
potentially contested proxy issues. This more than not falls to the
corporate secretary. If the IRO is involved, he or she should consider
including the portfolio manager in those meetings, even though they
generally are not the ones who vote the firm’s proxies. Unfortunately, the
smaller firms that do not have the staff to read through and vote the
proxies are deferring to ISS, primarily, to vote for them. In doing so,
these funds have forgotten they owe a fiduciary responsibility to those
whose money they manage. Fiduciary responsibilities for proxy voting are
determined by ERISA for pension funds and by the federal securities laws for
investment managers and mutual fund directors. This means that, at a
minimum, institutional investors must at least review, by individual
companies, how their proxy advisory proposes to vote, how votes were
actually cast, and whether those votes are consistent with the manager’s
proxy voting policies.
As to the executive
compensation issue, we believe most companies have done a poor job of
providing investors a plain English description of the “how and why” of the
board’s decisions on executive compensation. And, John White, director of
corporation finance at the SEC and Chairman Chris Cox, reflect this view in
their comments on the CD&A. One problem is that the IROs, in most cases,
have played little or no role in crafting the CD&A. The lawyers, the HROs
and compensation consultants have eclipsed the IRO role. At the NIRI Senior
IR Roundtable in December 2006, when the group was asked for a show of hands
regarding how many were involved in crafting the CD&A for their 2007 proxy,
two hands went up from just over 80 attendees (some were consultants and not
involved in the CD&A process.) A lot of information is provided in the
CD&As but the presentation is not designed for clarity. I find particularly
disturbing a January 2008 Watson Wyatt survey (published in CFO magazine)
showing that 31% of 135 CFOs of S&P 500 companies said they had no intention
of disclosing the performance goals of the CEO and the four other senior
executives in this year’s CD&A. How are investors to determine whether the
CEO earned his or her compensation if they don’t even know the performance
goals the board uses in making its determination? If companies don’t make
the CD&A a document that provides better, higher quality information, they
should expect to encounter more say-on-pay shareholder resolutions.
In Lou’s August 2008
Compliance Week column “Learning From This Year’s Proxy Season” he urges
companies to help usher in a new era of board-shareholder relations. He
also recommends companies consider creating a board shareholder relations
committee consisting of the CEO, the non-executive chairman or lead director
and the chairs of the nominating and governance, compensation and audit
committees. This could be the group that meets with major investors and by
its representatives cover most of what any investors would want to discuss.
This would also make a substantial statement that the company is serious
about communicating with its shareholders.
Lou also made the point that
we are seeing a shift from major investors, particularly hedge funds, who
want to meet with the board to discuss a change in strategic direction as
opposed to the more traditional requests by major investors to discuss
governance issues. This can be more delicate discussion since the investor
is, in effect, attacking the strategy in which management and the board take
ownership. It’s important to listen to what the investor has to say, but
not signal a willingness to adopt a change in strategy unless it is willing
to make that public information.
Some thoughts about the
various forums mentioned in the paper:
Open -- same as an annual
meeting. With no agenda, that forum rarely works, why would this be any
Invitation only -- the issue
of how to choose who is invited to a forum that is highly structured but not
all topics of interest to the larger shareholders can be discussed.
Formal group -- again,
membership an issue -- length of holding vs. size – not possible to please
everyone! Worked well for UnitedHealth Group that received criteria that
advisory group would like to see in board candidates.
Informal -- probably worse.
Proxy rules an issue?
Individual outreach and
responses -- probably most workable on a specific issue. Once the precedent
is set, will need to apply criteria for meetings consistently. Very defined
agenda given all shareholders would have access.
Technology -- paper mentions
briefly, but some good innovative thinking here might create forums that
work for all and provide equal access without burdening resources.
What about the idea of a
Board-generated perception study that reaches out to the corporate
governance people at the institutions -- could even do a sampling of retail
investors? They get the feedback without any disclosure issues.