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The observations below were offered in response to the following invitation to comment on a paper:

Jane W. McCahon is the principal of Conway Communications, and has served in several major investor relations and corporate communications positions and was Chairman of the National Investor Relations Institute (“NIRI”) from 2001-2002.

Louis M. Thompson, Jr., is a managing director of Kalorama Partners, and served as President & CEO of NIRI from 1982-2006.  Mr. Thompson is currently a member of the Forum's Program Panel for reconsidering "Say on Pay."




Comments on “Talking Governance” Working Paper

August 11, 2008


Jane W. McCahon


Conway Communications

Sudbury, MA


Louis M Thompson, Jr.

Managing Director

Kalorama Partners, LLC

Washington, D.C.

·        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.

·        In reality, 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 this effort.

·        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.

·        Fiduciary duty -- 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 counsel.

·        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 different?

·        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.







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