“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.

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.

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.

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.

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.

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.

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.

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.

The rules will be in effect by the 2010 proxy season and could be published as early as next week.

Do boards understand that they are being challenged to communicate more openly with their shareholders?  Better communication gets to the heart of many of the governance issues that the SEC and the pending legislation hope to address.

So what’s a board to do?

Boards should think in concrete terms about what they have communicated with their shareholders in the past and how they can improve the clarity of communication.They should avoid legalese and adopt plain English in their discussion about risk, compensation and governance.

Greater disclosure is about clarity.  Boards are in a communication battle they can win if they recognize the element of respect in their communication with the company’s owners.

Panelist  Fred Steingraber, former Chairman and CEO of AT Kearney and director of several US and several international boards, said the time for boards to react was over.  Rather, boards should take a leadership position by demonstrating that they provide value through their oversight through transparency and better shareholder communication.

“Boards are in the midst of a very serious struggle to regain respect and control over  their growing responsibilities and image,” said Steingraber.  “To accomplish this will require demonstrating the will and capacity to make changes ranging from board organization/leadership, policy, process, committees, board composition to shareholder communications. They must now demonstrate leadership at the board level with a results orientation in the conduct of their work.

“Today,  the government is taking control of boards, largely due to directors not building good relations with shareholders and all too frequently being too defensive and too reactive in their communication.”

Boards need to break their silence to retain and regain control rather than ceding authority to critics.

Not only do boards need to listen to  shareholders to understand their concerns, but they also need to go beyond the derivative information that they normally receive to drill down to the underlying issues of business performance, said Steingraber. “Boards need to put together a longer term program that addresses the issues of succession planning and risk management.  This will not happen overnight.” For that reason boards need to lead by creating a  framework for change and communicate those changes, which will take place over time.

While many measures are drawn from Senator Charles Schumer’s (D-N.Y.) Shareholder Bill of Rights, this greatly expands the scope.

Just last week, David Gergen, American political consultant and presidential advisor during four administrations, opined about the state of the economy at the Council of PR Firms’ Critical Issues Forum according to Weber Shandwick’s Chief Reputation Strategist, Leslie Gaines-Ross in her Reputation Exchange blog.

What a message for corporate boards to take the initiative to build trust by engaging with shareholders with effective board-shareholder communication programs.

“I have never had a shareholder group ask something that was inappropriate,” said Hill. “They are aware of Regulation FD. We may not always agree but I think it’s very important to listen and sometimes  agree to disagree. We have learned so much from talking to shareholders.  It’s made us better directors.

Her earliest meetings with shareholders came about because of shareholder issues or concerns. Now,  the company talks with shareholders when they want input. For example, when the Home Depot board was working on director succession plans, they contacted long term large shareholders for candidates to consider.

“We found that amazingly helpful, said CalSTRS Anne Sheehan.  “It demystifies the process, which enables us to better support the company’s long-term objectives.”

Such proactive work has accrued to the company’s benefit.  “When you are in reactive mode, it is so much more time consuming, ” said Hill. With a more open dialogue, Hill says the board has more time to spend on strategy and other key issues. And it has added to a positive reputation for the board and the company.

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.

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.