July 23, 2014

Shareholder Engagement: Should Directors Be Politicians? 10 Things to Consider

I know the title of this particular blog sounds sensational – but the opening of this DealBook column by Andrew Ross Sorkin about shareholder engagement is “What if lawmakers never spoke to their constituents?” So let me deal with the top 10 points that I see in this column since it created a stir yesterday:

1. “Within the clubby world of directors, communicating with shareholders, big or small, is overtly frowned upon”

My take: I agree that it’s quite strange that the notion of shareholder engagement is something that only recently is in vogue. Then again, the term “corporate governance” was barely used – or understood – until about a dozen years ago. I make fun of this sudden fascination with engagement in this 90-second video entitled “10 Silly Ways Towards Better Shareholder Engagement.” I should note that The Conference Board issued a statement yesterday clarifying its position about directors engaging (i.e. they support directors speaking directly with investors, particularly in special circumstances such as when investors have lost confidence in a board or management)- Sorkin didn’t characterize their position quite right.

2. “At least 1,000 large United States public companies to receive a letter this month from a group of shareholders representing more than $10 trillion in assets with a demand: Talk to us.”

My take: Here’s the July 2nd letter if you haven’t seen it. The letter doesn’t demand direct shareholder-director engagement. Rather, it asks boards to “consider adopting and clearly articulating a policy for shareholder-director engagement, whether through adoption of the SDX Protocol or otherwise.” The letter notes that JPMorgan’s proxy statement explicitly endorsed the SDX protocol – and that its board met with shareholders representing 40% of its base. The letter notes that less than 25% of the S&P 500 disclosed their engagement efforts in their proxy (I note that even the ones that disclosed their engagement efforts likely didn’t mention shareholder-director engagement).

3. “Some directors avoid meetings, worried about speaking with one voice”

My take: This seems like a valid concern on its face – but smart shareholders know that each director has their own views. Those shareholders seeking to meet a particular director typically just want to ascertain whether they are truly independent and capable of doing their job. They are not looking to meet a politician.

4. “Most don’t consider it their responsibility”

My take: Directors are supposed to represent shareholders. Although I agree it’s not a primary responsibility – and most directors don’t have the time to do a bunch of meetings – they shouldn’t shun shareholders.

5. “Some are anxious about accidentally disclosing sensitive information”

My take: If a director isn’t capable of meeting with someone and not giving away material nonpublic information, they shouldn’t serve in that role. Note that Corp Fin has issued Reg FD CDI Question 101.11 which clarifies that directors are not prohibited from speaking privately with shareholders. This CDI should give directors comfort that private meetings are not intrinsically problematic so that they can participate in governance engagement efforts.

6. “Some chief executives are insecure and don’t want shareholders to get too close to their boards for fear they will have undue influence”

My take: This is an interesting one. On its face, the CEO shouldn’t be insecure as these typically are short and simple meetings (and normally a company officer accompanies the director). But look how lobbying has destroyed Congress. So long as the engagement process is kept in check, this concern isn’t a valid one.

7. “Many top executives seem to think that board members cannot be trusted with such interactions”

My take: It’s true that most boards will have some directors that are not “camera ready.” But smart shareholders will know that and not expect (nor want) a board full of politicians.

8. “If a board becomes too enamored with a particular view from a set of shareholders, it could lead to short-term thinking that undermines long-term performance”

My take: True dat.

9. “Large investors might have the opportunity to meet with directors while small retail investors almost certainly never will”

My take: This is reality. But as I blogged yesterday, companies can post video interviews with directors so that anyone can get a feel for a director.

10. “The shareholders despite saying they want a dialogue, actually aren’t interested”

My take: This is a real problem: boards going on governance roadshows with few attendees. At our executive pay conference, the comments made during my “investors speaks” panels illustrate that there are a variety of views towards whether directors need to meet with shareholders. Shareholders have limited time availability, just like directors. By the way, I just posted this sample Powerpoint that can be used for a governance roadshow…

Our “Shareholder Engagement Checklists”

For me, the upshot is that boards should consider adopting shareholder engagement policies – and this is a topic ripe for proxy disclosure (many of the proxies I highlighted in my video series this year included this disclosure). Remember that we have a lot of good practical stuff in our “Shareholder Engagement Checklists”:

Shareholder Engagement – Committees
Shareholder Engagement – Considerations
Shareholder Engagement – M&A Announcements
Shareholder Engagement – Policies

It’s Done: 2015 Edition of Romanek’s “Proxy Season Disclosure Treatise”

Just ahead of my vacation, I have wrapped up the 2015 Edition of the definitive guidance on the proxy season – Romanek’s “Proxy Season Disclosure Treatise & Reporting Guide” – and it’s gone to the printer. You will want to order now so that you can get your copy as soon as it’s done being printed. With over 1450 pages – spanning 32 chapters – you will need this practical guidance for the challenges ahead…

– Broc Romanek