Directors, Your Job Is to Effectively Engage with Shareholders

Mary L. Shapiro, SEC Chairmandirectors, was as plain-spoken and direct as she could be in addressing the 600 plus directors at the National Association of Corporate Directors annual conference, thanking them for inviting her to speak at a time when  “so much about what you do — and what I do — is being fundamentally transformed.”

“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.

Directors Face a Changed World

Directors Face a Changed WorldAs Ira Millstein told directors on a recent NACD/Weil webinar on the Dodd-Frank Act, they must align with the owners of the company, the shareholders. He advised directors “not to make believe” or “live in a dream world” because governance power has already shifted to shareholders and it’s not going to be the way it was ever again.

The context for this change is the “new normal”, a term coined by economists that characterizes an environment of high unemployment, slow growth, consumer distress, overly careful investors and long-term owners who will seek growth where they can find it. This is a challenging environment in which to serve as a director.

Millstein sees the changes wrought by the Dodd-Frank Act as tectonic, making Sarbanes-Oxley look like child’s play.

But directors shouldn’t wait until the final rules of the Act are written.  Rather, they should engage with their shareholders now.  He cited the fulsome letter that the Prudential board wrote in the proxy, introducing their thoughts on compensation. While Millstein believes directors should know what their shareholders think, he doesn’t believe that they have to agree with them.  “Explain why the board has a different view.  That seems to me perfectly rational.”

He noted that there was a huge amount to do in communication with shareholders and boards should get ready to engage. Now.

Bill Ruckelshaus Looks Back, Offers Advice Going Forward

Bill Ruckelshaus Looks Back, Offers Advice Going Forward William Ruckelshaus describes how the U.S. got serious about environmental issues with the creation of the Environmental Protection Agency 40 years ago in his Saturday commentary in the Wall Street Journal.  The turning point from the “race to the bottom” came when the public demanded action.

If that’s where shareholders and the larger public are today on corporate governance issues, directors should take notice. A top-down standard setting enforcement process of the 1970s isn’t going to fix the more complex issues today. He concludes that “people affected by change have to be deeply involved in crafting of solutions” and “we have to get better at both involving people in the process of change and providing them with enough information to make that involvement useful and worthwhile.”

While he’s talking about environmental issues, couldn’t that be applied to boards and shareholders?

As Bonnie Hill has observed in her years as a director engaging with shareholders, “We have learned so much from our interaction with shareholders. It has made us better directors.”

The world has changed.  We can’t fight the last war or use yesterday’s solutions to solve today’s problems. The new tools are more direct engagement with shareholders, not to pacify them but to involve them in the long-term investment of our companies.

Goldman Decides It’s a Good Idea to Communicate with Shareholders

In advance of its May 7th annual meeting with shareholders, Goldman Sachs used surprising candor in an eight-page letter in its 2009 annual report. Reiterating that it didn’t ‘bet against’ clients using short positions it took on before the residential real-estate market crashed. Rather, it was one of the first Wall Street firms to reduce its real-estate exposure, “even as some clients were sticking with their bullish bets.”

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.

Prudential Sets a New Standard for Communication with Shareholders

Not only does Prudential Financial prove that the proxy can serve as an effective communication vehicle to shareholders while fulfilling its legal requirement, but the company has added a number of innovations that set a new standard for others.

It begins with the Letter from the Board of Directors to our Shareholders: “As stewards of the Company, we are committed to governing Prudential in an an effective and transparent manner.  We hold ourselves to high standards with respect to governance “best practices” and we believe that communicating with you on significant matters is an important part of our obligation to align governance and management with the best interests of shareholders.”

The letter summarizes the way the board has been responsive to shareholders, items that will be explained in depth in the proxy but the letter enables the board to highlight its shareholder-friendly approach, from the advisory vote on executive compensation, the special financial award to 15,000 employees, clawbacks, the board’s active engagement in succession planning and how it has approached risk oversight.

It also invites shareholders to write to the board providing an email address for independent directors as well as a website for feedback on executive compensation. How simple and effective.

The proxy does a nice job of describing the current board and their qualificationsas well as a process for selecting directors including an explanation of how shareholders can recommend director candidates. The board explains its process and philosophy for compensation.

Best of all, it’s in plain English, clear, readable and understandable.

How Boards Can Rebuild Confidence

When the former general counsel of Calpers notes that boards need to assert strong independent leadership and take the steps that allow for the ” new phenomenon” of increased dialogue between directors and shareholders, you know that the idea of real director engagement with shareholders has taken root.

In his opinion article in AgendaWeek, Richard Koppes discusses the ways directors can rebuild trust.  Because Koppes has served for 30 years in highly regarded expert in corporate governance, his words should reassure directors, especially those who began their service ten years ago.

In an article “Giving Boards Their Voice”  in  the new Korn Ferry International Briefings on Talent,  I discuss  the shift–from behind-the-scenes advisors to highly accountable public figures. It  is a profound transformation that boards are only beginning to grasp.  The article discusses the importance of board-shareholder communication.  By establishing independent communication, boards and their companies may succeed in quieting dissenting shareholders and even winning the confidence of investors enabling companies to operate in the interests of the long term.

Directors Have an Opportunity

The Deloitte/Directorship survey demonstrated that opinions from both “Main Street” — journalists, policymakers, analysts and the “C-Suite”  including CEOs and directors as well as teachers, laborers, policymakers, doctors, students and community leaders have a relatively poor opinon about the effectiveness of the current corporate governance.

Smart CEOs and boards will see this as an important opportunity to use the current proxy season as a way to reach out to shareholders in a credible way.  By drafting CD&As in plain English that are designed to explain the board’s philosophy in devising pay programs that reward performance rather than failure.

The InterimCEO is a worldwide network of interim, contract and project executives.  Their website has posted my comments on board leadership on their home page. The InterimCEO network serves as a rich resource for executives and companies that are looking for assistance.

A Financial Icon Offers an Agenda for Restoring Faith

John C. Bogle, the founder and former CEO of the Vanguard Group, cites a host of interesting statistics that document the changes in the investing public in his call for  the creation of a Federation of Long-Term Investors, in which institutional investors, who alone hold some 15 percent of  U.S. stocks would join together to force changes in public company governance.

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.

The Public Has an Opinion about Directors

As directors read the landmark survey of Main Street and C-Suite undertaken by Directorship magazine and Deloitte in conjunction with Korn Ferry International, they will see that the public’s opinion of them and their performance is not high.

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.

An Opportunity for Directors to Communicate More Effectively

TK Kerstetter’s very interesting program  This Week in the Boardroom  took an interesting look  back on the events of 2009 that will impact boards and directors in the years ahead. Both Kerstetter and his guest, Scott Cutler noted that corporate governance has been politicized and  wrongly blamed for the financial crisis but both see opportunity for directors to focus on effective corporate governance and the key role that directors play. 

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.