Director-Shareholder Engagement: Limits and Possibilities

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Stakeholder communication is clearly a hot-button governance issue today. Some stakeholders— including institutional shareholders, activist shareholders, and regulators—want to have a dialogue with directors. But directors have differing opinions about what—and whether—to communicate. Each board should consider the circumstances where it may or may not be appropriate to engage with shareholders—and why. This panel discussed communication with shareholders, based on the panelists’ collective experiences.

1. Ideally, boards should be proactive in reaching out to engage with shareholders. Shareholders are a great source of information about how the company is perceived, which may differ substantially from management’s views. For example, management may view the company as a high flyer, but the investment community may place it in the moderate growth category. Such dialogue can also alert directors to the magnitude of any investor dissatisfaction, although it’s important to note that investors don’t speak with a unanimous voice.

2. Boards should get regular information about their shareholders, covering the top 15 or 20 investors, as well as who is moving into and out of the stock. It’s also helpful to have the investor relations department talk to former shareholders to understand why they no longer own the stock. If directors are meeting with shareholders, the directors should be briefed on whether the shareholder representatives are on the proxy voting side or the portfolio management side, what the investor’s governance policies are, how the investor uses proxy advisory firm recommendations, and whether the investor has supported activists in the past. This is part of the extensive preparation directors should do before engaging in dialogue. It’s also worth noting that, as well as spending sufficient time to prepare, directors need to devote substantial time—sometimes weeks—to these outreach and dialogue efforts in order to be effective.

3. There are two other concepts to note. The first to consider is how traditional disclosures can be improved so companies can communicate with shareholders more effectively. One recommendation was for a two-page summary of the proxy to provide a plain English overview of the company’s governance. The second is to understand what commentators are saying about the company on social media. The potential problem is that outsiders who comment on the company aren’t obliged to be correct. But whether the company chooses to address incorrect information or not, it’s helpful for investor relations functions to track those messages, as incorrect information may influence investor perception.

Erroll B. Davis Jr.
Director, General Motors, Union Pacific Corp.

C. Kim Goodwin
Director/Trustee, Allianz Global Investors Mutual Funds, Director, Banco Popular Inc; Non-Executive Director, PineBridge Investments LLC

Debra J. Perry
Board Member, Audit Committee Chair, Korn/Ferry International; Board Member, PartnerRe

Robert Schifellite
President, Investor Communication Solutions, Broadridge Financial Solutions

This summary provided by PricewaterhouseCoopers.

How to Land—and Keep—the Right Board Seat

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What does it take to get on a board? It’s not an easy task. Identifying, approaching, and successfully procuring a seat on the right board can be a long, and sometimes daunting, journey. This panel offered insights on the future of boardroom composition. Having a board made up of people with relevant skill sets and experience is critical in today’s competitive business environment, and boards want the best candidates available. The panel discussed the latest trends in director recruitment and how they impact the search process. It also discussed the qualifications most commonly found in successful candidates. Maggie Wilderotter, chairman and CEO of Frontier Communications Corp. and director of Xerox and Procter & Gamble, shared her perspective and experiences, having served on 23 public company boards over the last 28 years.

1. Boards are focusing more on succession planning—looking three to five years out for the skills they’ll need to help drive success. It’s not surprising that most board searches still focus on CEOs (which is what large-cap companies want) or business unit heads (which mid-cap companies seek). Whatever the title, the key is that person has a track record of making good decisions. What’s also notable is that the majority of directors landed on boards because they knew an influential person, such as another director, who recommended them.

2. Board search firms will often reach out to CEOs and directors to ask for the name of the best director on their board and why that person provides the most value. Often the characteristics of those “best” directors are similar. They keep the company top of mind. They are bright and have good judgment. They challenge, but do so respectfully. And they mentor management. They are also generally likeable and are easy to interact with.

3. If you’re looking for a board seat, you need to be able to articulate where you could add value. That often means focusing on the two or three industries where you believe your skills would be a great fit. And be strategic in identifying companies on whose boards you would like to serve, then make it your mission to get to know those directors. You also need to understand who else is on the board and be comfortable that you would fit with the culture and values.

Robert E. Hallagan
Vice Chairman & Managing Director, Board Leadership Services, Korn/Ferry International

Maggie Wilderotter
Chairman and CEO, Frontier Communications Corp.; Director, Xerox, Procter & Gamble

This summary provided by PricewaterhouseCoopers.

Story Circle: Discovering Agreement

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Linda Alvarez discussed “Discovering Agreement,” a powerful alternative to the old-style adversarial model of contract law. Whether you’re buying a cellphone, selling a business, starting a job, or hiring an employee, contracts are a fundamental part of our personal and professional lives. Traditional practices pit contracting parties against one another, laying a foundation of mistrust. Discovering Agreement is a new paradigm that places shared vision and values first and foremost in the negotiation. The result is a stronger, more sustainable, and enjoyable venture that can endure and prosper—even in the face of disagreement or unexpected change.

1. Traditional contracts are usually structured to try to predict everything that could go wrong and determine the outcome if one of those unfortunate events occurs. One of the problems with traditional contracts is that they sit in a drawer until something goes wrong and then are used in an adversarial manner. That approach provides little incentive for either party to “fix” or address what went wrong, as they instead focus on trying to “win” the dispute. This can increase the chance that both parties will lose sight of why they entered into the contract in the first place.

2. The Discovering Agreement approach works within the framework of traditional contracts. It differs, though, by capturing additional information. Contracts structured under this approach provide for each party: (i) their vision, or higher purpose; (ii) their mission, or what they are joining forces to accomplish; (iii) their values, which will be key drivers under which they will operate; and (iv) their constraints and imperatives, which are what they must avoid and must accomplish with the contract. These serve as touch points if anything goes wrong, to bring both parties back to why they entered into the agreement and what they were trying to achieve. These can either be in a preamble or in an exhibit, as an addition to the deal points and actions that a traditional contract captures.

3. The other key difference in the Discovering Agreement approach is the inclusion of an additional provision for addressing change and engaging conflict. This clause calls for the parties to first try to resolve any dispute through direct conversation. And that discussion will hinge on considering the vision, mission, values, and constraints and imperatives they set out at the start of their relationship. This requirement for dialogue can allow both parties to alter the terms of the agreement and get to a point where both “win” and achieve what they want from the venture. To be practical, this provision will include a time limit. So, for example, if the parties are unable to come to agreement after a certain number of hours of discussion, then they agree to call in a mediator before resorting to litigation or other proceedings.

Linda Alvarez
Founder, Discovering Agreement, Attorney, Integrative Law Practitioner

This summary provided by PricewaterhouseCoopers.