After a visually stunning acrobatic performance by members of Cirque du Soleil, NACD Chairman and former U.S. Secretary of Commerce Barbara Hackman Franklin opened the 25th NACD Board Leadership Conference with a call to restore public trust in capitalism.
With conference attendees representing nearly all 50 states, all of NACD’s 22 chapters and 10 countries ranging from Kuwait to Jamaica, Franklin noted that “governance is indeed global.” However, her focus on capitalism was focused specifically on the American style of market capitalism. From a historical perspective, capitalism generally falls under attack following economic crises and scandals. The Enron and Worldcom scandals resulted in the enactment of the Sarbanes-Oxley legislation one decade ago. Today, directors are in the process of incorporating the many provisions to come out of the 2010 Dodd-Frank financial reform legislation.
In her speech, Franklin noted that public distrust of business executives is at an all-time high. As such, businesses are operating under the “new normal.” No longer are public companies expected to just make a profit for shareholders. According to the NACD chair, the smartest companies are paying attention to such areas as the environment, sustainability, and diversity.
Franklin listed five ways directors can support a restored faith in capitalism:
1. Be the best [directors] can be.
2. Stress the tone at the top: The critical ingredient for long-term ethical behavior is culture.
3. Build a strong board that values openness and candor.
4. Push for corporate social responsibility actions to be embedded in the company strategy.
5. Stay current: Continuing education for corporate directors is a necessity.
The time to act, according to Franklin, is now. If companies do not step up, the government will step in.
As reported in The Dallas Morning News and featured in Monday’s NACD Directors Daily, more than 80 percent of Americans believe there should be limits on the amount of money corporations can contribute to groups trying to influence political campaigns. More than two years after the U.S. Supreme Court’s Citizens United ruling, corporate political spending remains under scrutiny, and shareholder resolutions regarding the disclosure of political activity make up the largest portion of environmental and social policy proposals. While the number of political proposals has doubled since 2008, they have leveled off since 2011, with 116 proposals filed in 2012 to date. The average level of shareholder support for these proposals, depending on company size, sits at low to mid 20 percent, higher than the average of 18 percent support for environmental or social policy proposals.
Most shareholder proposals request disclosure of political or lobbying spending, while a small number of proposals seek to actively limit these corporate expenditures. The latter group either seeks advisory votes on political spending (averaging 7 percent support) or calls for a stop to all political spending (averaging 3 percent support).
Research studies are inconclusive regarding the effects of corporate political expenditures on shareholder value. A number of studies have found positive correlations between political contributions or lobbying activity and benefits to economic and shareholder value. Within the last few years; however, three new studies have found negative correlations, claiming that corporations involved in political spending suffer from decreased shareholder value or under perform their peers.
This proxy season, the Center for Political Accountability (CPA) submitted 51 political disclosure proposals, making it the most active shareholder activist group in this regard. It has also released its model resolution template for 2013, which may be, if this year’s trends continue, the most frequently employed political disclosure proxy proposal. On last week’s episode of BoardVision, NACD spoke with Ken Gross, head of the Political Law practice at Skadden Arps, who provided directors with insights on these shareholder proposals.
For all the hyper-connectivity in today’s world, CEOs and boards have precious few opportunities to reach out to shareholders in a way that is personal, memorable and compelling. Most communication between the C-suite and investors is filtered through multiple handlers and channels. The requisite legal and regulatory compliance language is often such a distraction that the real meaning, and the real intent, of the message can be lost.
The annual letter on the “state of the company” included with a company’s annual report is an ideal tool for CEOs and board chairs to more closely communicate with all shareholders, from global institutions to the smallest investors. Yet too few companies fully seize on this ready-made opportunity. Many CEOs are content to just keep it short and focus on the financial story, offering little context on the events that defined the past year and no articulated vision of what investors can expect in the future.
It’s a missed opportunity, as CEOs could and should be using the annual letter to provide all shareholders a glimpse into who they are and how they’re running the company. They could and should be sharing their best thoughts in their own voice, spotlighting issues and topics in a way that will build confidence among investors that the right management team is at the helm.
The undisputed master of this forum is (no surprise) Berkshire Hathaway Chairman and CEO Warren Buffett. Buffett’s annual letter to shareholders topped the recent NACD Directorship magazine’s list of Best Annual Shareholder Letters, which evaluated the entire Fortune 200 list.
Buffett’s letter is understated yet highly informative, giving credit where credit is due, reinforcing the corporate business strategy, and setting the table for how he wants investors (and others, including analysts and media) to perceive the company and its leadership.
On each of the five criteria that NACD Directorship uses to analyze CEO letters, Buffett was in a class of his own. His letter provides a dynamic assessment of the corporate performance, full transparency, a clear outline of the steps Berkshire Hathaway is taking to tackle its challenges, a strategic process that accounts for environmental changes, and insights into the corporate management style. Buffett transforms the shareholder letter from a simple formality into a major influencer on how his company is perceived.
As a tool that actually builds shareholder value, Berkshire Hathaway’s letter is in a class by itself but certainly not the only notable example. Coca-Cola, FedEx, General Electric, General Motors, Google, and Wal-Mart all stood out as companies that go beyond formalities by utilizing the annual report letter as a critical communication tool.
NACD Directorship also singled out others—including the Bill and Melinda Gates Foundation, Abbott Laboratories, Amazon, Avon, Exelon, Hewlett-Packard, News Corp., and Zipcar—for how their letters coherently explained and evaluated special circumstances that had arisen.
All of the letters on this year’s list of the best offer a real insider’s view—and it is, after all, the essence of effective IR to help investors feel they’re personally part of the team. Executives act like leaders when they show their stakeholders how they lead.
For more examples of great shareholder letters, visit www.NACDonline.org/Power-of-the-Pen. We hope they inspire you to utilize some powerful communications strategies of your own.