“Ideas, particularly political ideas, are meant to be shared, to redefine themselves over the blue flame of discussion…increasingly Americans live in separate information silos. In uncertain times the tribes gather close. People don’t talk to outsiders.”

The editors urge the press to help “rebuild the forum that makes democracy work by being its best self” by taking steps to “Ignore the bias bullies”, “Stand up for facts” and “Return to deep reporting backed by institutional processes” which means “lots of feedback from near and far, fact-checking, copy-checking and double-checking, all part of the practical effort to publish something as accurate as possible.

“A massive retreat into ideological niches is hardly restricted to cable TV, and it doesn’t help the nation address its challenges.”

Amen.

“Speaking both as a regulator and as a former board member, I believe that it is vital that shareholders and board members move beyond the minimum required communications and become truly engaged in the shared pursuit of high quality governance.

“For boards and their companies, engagement means more than just disclosure. It means clear conversations with investors about how the company is governed — and why and how decisions are made.

“But engagement is a two-way street. Boards can also benefit from access to the ideas and the concerns investors may have. Good communications can build credibility with shareholders and potentially enhance corporate strategies.”

It wasn’t surprising then that the first question during the Q&A asked about running afoul of Regulation FD.  As she has said in the past and repeated “Reg FD doesn’t present a barrier to director-shareholder communication. “We have provided additional guidance to directors such as pre-clearing conversations, imposing no-trading restrictions on the shareholders who are talking to directors.  In short, Regulation FD is not meant to be a barrier.”

In conclusion she noted that, “Technology, investor attitudes and the way financial markets work have all changed dramatically during the past decade. The way in which we, and in which you and your shareholders communicate, must similarly change.

“The SEC cannot and is not interested in determining the communications strategies of individual companies. But we are interested in breaking down barriers that may prevent effective engagement, and affect investor confidence and, ultimately, financial performance.”

Boards should be developing communication plans now, re-examining their governance documents in light of the changing environment and developing strategies to contribute to improved governance.

Have you given your board the tools it needs to navigate the coming proxy season?  It’s up to you to see that your board is prepared.

The Dodd-Frank Act creates new requirements for board disclosure and greater transparency.  Governance power has shifted to shareholders, who are now empowered to hold boards and management accountable. How your board moves forward in this new environment is critical.

CEOs need to see their boards as helping them to restore confidence in the system. If you wear the mantle of both CEO and chairman, it’s even more critical that you set the tone for clear disclosure and genuine engagement with shareholders. It sends a signal that you respect their importance in the long-term health of the organization.

 The new disclosure rules encourage boards to build trust with shareholders through the application of sound principles, transparent communications and actively engaging with them to secure a favorable vote. Board members will need to become better communicators.  But they need guidance in demonstrating independence and credible oversight.  Some basic communication planning should begin now.

 What may prove to be a best in class approach is for the board to articulate its principles, its own “Articles of Governance” to serve as the source for board communication and shareholder engagement.  By reviewing its current identity, which resides in governance and legal documents, the board can craft a comprehensive board governance doctrine that prepares the board for the upcoming proxy season and beyond.

 This proactive approach enables the board to discuss and decide in advance how it will handle critical issues.  By working through issues in an atmosphere of calm, the board is better prepared to face a crisis and even avoid or mitigate one.

Disclosure in governance is an area we understand well and we would be happy to assist you.

During this period leading up to the proxy season, directors should be engaging in some form of self-evaluation to understand what their vulnerabilities are—do shareholders have concerns about executive compensation, the capabilities of the current board of directors or other governance issues? 

Nazareth reminded the participants that “investor protections has been a focus of the SEC and one way of ensuring protection is good corporate governance.”  

Directors should “consider ways to enhance shareholder communication so that you’re not in the position of your 3% shareholders feeling that they need to nominate their own directors because they are not being represented appropriately by the current board.”

Directors, do you have a shareholder engagement program? Have you reviewed and assessed the board capacity for shareholder communication and dialogue?  Have you discussed how you will handle increased dialogue and interaction with shareholders?

The board world has changed.  Shareholders have greater power to influence board composition and executive pay based on the provisions of Dodd-Frank for proxy access, say on pay, limits on broker discretionary voting.

By remaining silent, boards increase the power of proxy advisors as the only independent guidance to shareholders on how to vote.  Boards increasingly need to engage with key shareholders, initiating communication and dialogue.

Get started now.

Hurd and his predecessor, Carly Fiorina, who was also fired by the board, brought new meaning to the HP Way.  Certainly, it was a different company than when brilliant engineers and founders William Hewlett and David Packard were at work in the company. Their instinctive style of “managing by walking around” would be almost impossible to replicate. Fiorina, ambitious and eager to make her mark aggressively drove the Compaq merger while a subplot revealed that the HP board had its own problems as chairwoman Patricia Dunn stepped down facing felony charges. After the scandal, Hurd’s success was welcomed even if he took a cost-cutting and execution style approach to management.

With Hurd occupying both the Chairman and CEO role, Robert Ryan has served as lead director since 2008.  But it has been Mark Andreessen handling the Hurd resignation.  As the founder of another storied company, Andreessen has the gravitas to insist on a leader that not only performs well but behaves well.

Andreessen is given to greater transparency as well as sensitivity to culture and a larger group of stakeholders including investors, employees and the larger public given that he is an under-40 wildly successful entrepreneur now leading a company that provides a platform for social networking websites.

Andreessen is the spark that HP needs at this time, setting the tone and communicating what the board is doing on behalf of shareholders and stakeholders.

Gregory made these remarks on a National Association of Corporate Directors and Weil Gotshal webinar attended by hundreds of directors on Friday as boards try to gain a better understanding of the requirements that the new legislation that President Barack Obama signed into law on July 21, 2010.

“I want to emphasize that the theme within the legislation is that boards are the problem,” said Gregory.

Boards are well advised to recognize that the implementation of the legislation will fundamentally change their interactions with shareholders.  For directors who have eschewed any contact with shareholders, they must engage with shareholders in meaningful ways to elicit their support.  The sooner and more intelligently that they begin this dialogue, the better for them.

The Financial Times concludes, “The [note] is an implicit admission that Goldman’s long-held strategy of giving short shrift to criticism of its behavior and pay policies during the crisis has done little to quell the public backlash against the Wall Street bank.”

After such a mea culpa, how will Goldman Sachs handle its annual meeting?  Will it be a kabucki show or will Chairman and CEO Lloyd  Blankfein lead his directors in a sincere effort to engage with shareholders?  Blankfein has a chance to demonstrate that he’s committed to minimizing reputation risk by making the meeting a true opportunity for shareholders to question and receive genuine responses from him and the board of directors.

It’s a dramatic change and they should be preparing now.

An investor network comprised of public pension funds, labor funds, asset managers, and representatives of public companies formed a working group and spent almost three years studying the ramifications of a say on pay vote.  The companies on this working group including Intel, Prudential Financial, and most recently Colgate have enacted some form of say on pay.

“Our intention is to hold the board’s feet to the fire, so that they are asking management questions on our behalf to protect our interests,” said Anne Sheehan Director of Corporate Governance of CalSTRS.  “There is a shift in communication responsibility, board members should talk to shareholders.”

She recognizes that such dialogue with shareholders could be time consuming.  Certainly boards should have some kind of mechanism to talk to their ten largest shareholders, she said.  But smaller shareholders should have some kind of unfiltered access to the board, through a website or other method.

To the many boards that have been reluctant to adopt an advisory vote, Timothy Smith, Senior Vice President of Walden Asset Management says that the advisory vote has become a more normalized response to the executive compensation issue and is not the fringe idea it was considered several years ago.  “There’s a strong business case to adopt say on pay,” says Smith.  “It’s a good defensive strategy and removes the potential for a conflict with shareholders.”

To the boards that counter that such a vote doesn’t tell the board anything, Smith responds:  “Yes, an advisory vote is a simple yes or no. But you should know where your shareholders stand on your compensation issues.  You should never be caught not knowing what your shareholders think. You should know that before the vote.”

Engaging with shareholders on key issues is what boards should be doing anyway.

In his Wall Street Journal opinion article Bogle quotes Leo Strine, vice chairman of the Delaware Court that “no longer are the equity holders of public corporations diffuse and weak.. (they represent a new and powerful form of agency.”

In the 2010 proxy season, boards of directors who develop programs of shareholder communication and active engagement with their owners will see better outcomes.

Directors need to know what people are thinking and saying and why.  The results from the first survey create a baseline drawn from “Main Street” — journalists, policymakers, analysts, members of the C-Suite including CEOs and directors and more importantly teachers, laborers, policymakers, doctors, students and community leaders.

Let’s begin with the credibility of board directors and CEOs.  While less than half, 43 percent, said board and CEO credibility was poor, 39 percent said it was only adequate and only 17 percent said it was good with only 1 percent said credibility of boards is outstanding today.

To the question of how boards performed their role of oversight during the economic crisis, a whopping 57 percent said poor with another 29 percent calling their performance adequate. A mere 1 percent gave boards an outstanding rating and 13 percent said good. 

What can directors do about these low ratings?  The Directorship article suggests that directors communicate.  Directors should be willing to engage in a role that helps shape public opinion says Korn Ferry’s Steve Mader.

To Cutler’s concern that ”the strongest voices in corporate governance are not being heard,” we offer the suggestion that directors could use their strong voices to communicate with greater clarity, rather than settling for languages that satisfies lawyers.

Both Kerstetter and Cutler lauded SEC Chairman Mary Schapiro who has moved quickly to bolster the SEC’s regulatory and enforcement powers. At the same time, she strives to communicate intent in all the “why” of the SEC’s action. 

Take the recent press release about increased disclosure:  The SEC announced new “rules to enhance the information provided to shareholders so they are better able to evaluate the leadership of public companies.” The rules “will improve corporate disclosure regarding risk, compensation and corporate governance matters when voting decisions are made,”  said Schapiro.

It’s true that shareholders are a diverse group and it is not the job of the board to satisfy everyone, but listening to varied points of view always improves decisionmaking.

Directors shouldn’t spend too much time railing against these firms. Rather, it’s time for boards of directors to bypass these groups and review their own governance policies including charters, bylaws and compensation rules so that they are well versed on the company’s corporate governance policies. At the same time, boards should develop an understanding of its shareholders and their concerns.

With this knowledge, boards will lower their resistance to speaking out about the role they play in providing oversight. They will become “communication ready,” willing to craft their own communication policy, a “rules of the road”, so to speak that supports a customized and effective shareholder engagement program.

In the old world where directors were assured easy election, criticizing proxy advisory companies was easy sport. Today, boards need to speak for themselves, communicating their competencies and the attention they are dedicating to the important work of representing shareholders and providing oversight.

In her opinion article in this  week’s Agenda, Franklin calls her fellow directors to action. “We, as directors, should simply step up to the new environment.  Directors must demonstrate that we can make corporate governance more effective to serve the company and other stakeholders.  I truly believe that more effective governance and more vigilance on our part can contribute significantly to a company’s better financial and ethical performance.”

She goes on to describe the two broad areas:  one in directors rededicating themselves to understanding the companies they serve while renewing their own commitment to “integrity, good judgment, excellence and the courage to hold ourselves and company management to the highest standards.”

Second, she advises directors to reevaluate how well board members work together as a group and whether the group works constructively with the CEO.  And, if something needs fixing, “fix it.”

The world has changed and boards need to step up, not complain about government involvement or the fact that shareholders have achieved power that boards must recognize and accommodate to make private enterprise better.

“We as directors have a responsibility to roll up our sleeves, do our jobs better and prove that private sector solutions remain the best way for American business to operate.”

She urges directors to accept the NACD’s principles for strengthening governance.

You will find that the 10th principle is shareholder communication, “Governance structures and practices should dbe designed to encourage communication with shareholders.”

As Franklin says, it’s time for directors to make the changes necessary to bring value to the companies they oversee and the shareholders they represent.

A synonym for input is contribution.  Imagine if boards saw the comments and suggestions that they receive from shareholders as the way that shareholders want to contribute to the improvement and long-term strength of the company.

Trust fosters trust.  If boards want to engender more trust among shareholders, they can start by trusting that their shareholders sincerely care about the issues they raise and want what’s best for the company and all shareholders.

Boards that start with finding common ground with shareholders can then build outward.  Neither directors nor shareholders expect to be in complete agreement.  But such an approach is respectful and has as its goal the shared long-term health of the enterprise.

Naturally, boards will want to analyze the broker element of the proxy voting for their company. Yet any outreach to shareholders by the board should begin with a board-shareholder communication plan. Boards need a written communication policy, as prescribed by the National Association of Corporate Directors suggest in their Blue Ribbon Commission on Board-Shareholder Communication. What are the goals of the board’s communication?  Will they take a minimalist approach because there have been few shareholder petitions? Has shareholder communication to the board increased in the past year? What are their vulnerabilities?

Writing a board communication policy causes the board to think through these issues, enabling them to anticipate and avoid crises and to protect the company’s brand.

Boards face other changes on the horizon including shareholders’ bill of rights and proxy access. By working through these issues, boards begin to come to terms with the changed world in which they are operating. Smart board-shareholder communication is one way that boards can retain and regain control rather than cede their authority to critics through silence.

Wednesday’s Wall Street Journal describes the campaign by law firms, associations and companies to derail or weaken the current SEC proposal, which makes it easier for shareholders to nominate directors.“Fight Brews as Proxy-Access Nears” outlines the changes that proxy access, or Rule 14a-11 would allow stockholder groups, whether activist hedge funds or institutional investors, to place a candidate on a company’s proxy materials at the company’s expense. Furthermore, all of the candidates would be listed together eliminating the current practice of voters checking one box to vote for management’s slate of candidates

Boards have a window of opportunity to use communication as a risk management tool.  How much better for boards to frame the conversation about current governance practices rather than waiting to react and comply with the new rules? Boards have worked hard to assemble the right expertise on their boards, but few shareholders know how the amalgamation of talent serves to bring diverse views  and business experience to their oversight role.  Directors are listed in the proxy and appear on websites, however the information does  little to highlight their expertises.  Many directors are fearful that proxy access will weaken their boards just when strong boards are needed most.  There are a number of simple steps boards can take to convey to all shareholders the expertise and dedication of the board.   Boards that seize the moment with a customized board-shareholder communication program will be well positioned when the SEC finalizes the proxy access rules this fall.

Furthermore, he has also communicated about how trustees will fulfill their management roles going forward—he has published names of committee members and assignments,  declared that all meeting materials will be delivered to board members ten days before the meeting to improve preparation and meeting effectiveness and  efficiency.

Stephen Davis of the Millstein Center believes that “the single biggest motive for all the reforms of the past 25 years has been the sense of voicelessness and helplessness felt by major institutional investors.”  If directors are supposed to represent shareowners (at least in part), but never communicate with shareowners, then owners become concerned when things aren’t going well.

As Kenilworth village president, Steingraber’s stakeholders are his friends and neighbors in a small 3,000 person community. He honors them by lifting the veil from the management of the town’s business. As a director of boards in the UK, Germany, India, Australia and the U.S., Fred has expressed concern over the government’s increased involvement in board’s activities.

Communication is one way that boards can retain and regain control rather than ceding to government through their silence.

But long-time participants and observers in the corporate governance community think it’s much more basic: it’s a sense of voicelessness and helplessness felt by major institutional investors. These shareholders believe they suffer from lack of access—to the directors, to information. This  “under-representation” feeds some activists’ demands to be recognized as owners, whether it’s advocating for “say on pay”, majority voting and in even a battle for board seats.

If directors seem confused by the criticism, it’s because many believe they have been in full disclosure through legal documents properly filed—the 8K, the 10K, the proxy, the governance documents posted on the company’s website. But in an era of transparency can boards afford to remain in the background?

The NACD’s “Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies” was universally endorsed by the director community.  But how many boards have designed “governance structures and practices” to “encourage communication with shareholders”? And what would it look like?

Shareholders have a legitimate interest in the governance of their companies. What are the issues for your shareholders?  How has the board addressed those issues?

Here are some points to keep in mind, courtesy of Ram Charan, “the go-to advisor for corporate directors and CEOs.”

• Shareholder activism is here to stay.  Boards need to change their psychology to see it as a constructive influence, not a nuisance.
• Boards must be prepared to communicate directly with shareholders when the situation warrants.
• Shareholders want the board to hear their concerns, but boards must be independent and sometimes push back.

In an effort to restore trust in the financial system, SEC Chairman Mary Schapiro wants to increase transparency and the quality of disclosure along with shareholder access to proxy voting.

Most boards are providing good governance.  Longtime directors may be puzzled by the scrutiny and concern.  “Directors need the tools of a politician,” says Stephen Davis of the Yale Millstein Center and  a longtime observer and participant in the corporate governance community.  “They’ve been able to assume support at annual meetings. That’s not the case anymore, not after the crisis. If boards handle it right, they can win the long-term loyalty of their investors . If they establish solid relationships with long-term owners—typically investors with longer time horizons—boards have more freedom to plan for the long-term.”

By tools of the politician, Davis is talking about persuasion, not just informing but rather respecting shareholder issues and concerns and responding appropriately.  Not necessarily by doing what they ask but by providing an explanation of why a decision was made.  Davis advocates that directors re-link with the owners of the company, the shareholders, a move that has long-term value for everyone.  Accountability improves performance. He sees the single biggest motive for all the reforms of the past 25 years has been “a sense of voicelessness and helplessness” felt by major institutional investors.

The sooner directors see the opportunity and begin to take measured steps in crafting communication policies that meet the needs of their particular companies, the more directors become a force for restoring trust.

“Communicating is not in our DNA,” one director confided.

At a minimum, boards need to develop their own communication policies to establish “Rules of the Road.”  That is, what should individual directors do when they are called at home by shareholders? Who represents the board to the media and under what circumstances? How does the board get important third party information without it becoming adversarial.

Given the shift from a director-centric to a shareholder-centric world, boards would be well advised to begin discussions about their approach to communication as they begin to craft policies.  In the meantime, shareholder expectations are growing.

Unfortunately, Schumer’s words are also directed to a public that has precious little understanding of what directors do. Accustomed to carrying out their duties behind closed doors, directors must recognize that they are no longer invisible. Investors, who now include taxpayers, are all too willing to accept the image that Sen. Schumer and the media have portrayed. Smart boards are not only adjusting their activities to bring greater focus to risk management and oversight in the current crisis but finding ways to better use their board time in dialogue and discussion to ensure long-term shareholder value. This is a time of credible actions and the communication that plainly describes the actions boards are taking.

Meanwhile, in Charlotte at the Bank of America annual meeting, shareholders stripped Ken Lewis of his Chairman mantle. Given these circumstances, most directors in this season of shareholder meetings felt lucky to escape with a random interruption by a shareholder gadfly or an extended question that became a chance to pontificate during the Q&A period.

Directors should not expect board/shareholder relations to snap back to its former state. Shareholders are likely to exert more influence given their success and aided by an activist SEC chairman Mary Shapiro determined to expand shareholder access to the proxy before the 2010 proxy season.

This is a time for directors to think through their vulnerabilities to determine if the company is at risk in the current shareholder environment. What issues are simmering beneath the surface? Most directors know. If they don’t, these traditionally quiet months are a great time to anticipate shareholder relations for the coming year.

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What types of issues must be considered when developing such programs? We provide the following broad considerations based on our own experience managing the board-level communications and publications:

1. Make communication a board topic to discuss:
   • Create an inventory of current methods of communications—both formal and informal—between directors and shareholders.
   • What developments in the past 18 months have changed these methods? Were there contentious elements in the annual meeting? Document any other communication-related problems or risks evident over the last 18 months.
   • Which shareholder communications are the boards currently seeing?
     • Is the full board seeing all communication from shareholders? Or, is the board seeing just what the Board Secretary deems the full board should see.
     • In this new environment, what is the board’s appetite for communication?
       • What processes will be put in place to govern communication?
       • Will the board name a primary contact for shareholders?
2. Assess current communication with shareholders
   • Assess issues of public and shareholder concern through correspondence and interviews.
   • How does the company’s communication compare with peer company communication with shareholders?
3. Identify opportunities for the board to anticipate and manage shareholder issues and concerns.
   • As directors identify investor concerns, they need to do the necessary research to understand motivation and intent. What are the investor’s holdings? What is the investor’s history and time horizon? What has the investor done in other companies?
   • What research has the investor assembled in making his/her proposal? What research has the company done?
   • What are the board’s position based on the shareholder input, the management position and additional research?
4. Develop an action plan
   • Designate the chairman, lead director or committee chairs as spokesmen.
   • Arrange for communication training. Even if the designated directors are comfortable with the press, the world has changed and the media has expanded to include bloggers and even twitterers.
   • Develop message points, ensuring that the board is speaking with one voice and with appropriate consistency with the company.
5. Execute
   • Maintain communication as an agenda item until the board has successfully executed one element of the communication policy—a directors web page, a shareholders’ meeting, or another board-generated communication.
   • Evaluate success and comfort of the directors.
6. Monitor and follow-up
   • Test the feedback. How are investors and shareholders responding? What adjustments need to be made?
   • What improvements does the board want to see?

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