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.

Highlights:
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.

Speakers:
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.

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