Tag Archive: Virtual Roundtable

Boards Must Prepare for Surge in Shareholder Activism

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After a two-year slumber brought on by the financial crisis, activist investors have suddenly awakened. The resurgence is driven in part by the sudden emergence of U.S. private equity firms as activist investors. This change in the corporate climate means that publicly traded companies must position themselves so that they do not become targets of these investors.

How can this be done? The answer is for directors to proactively engage these investors, thereby maintaining open lines of communications and building good will. This means that boards need to take into account the concerns these activist investors raise over a company’s stock performance, governance practices and perceived weaknesses in the business operation. In so doing, directors are better situated to thwart adversarial actions and “staged” revolts by certain activist investors.

After all, activist investors can have a profound impact on the overall composition and direction of a board. For starters, activist investors bent on driving the agenda of a company can attempt to pick up seats on corporate boards of directors. These investors can also wage public battles that tarnish a company’s image—accusing directors of everything from conflicts of interests to lax governance practices.

And the impact of shareholder activism on board operations only promises to grow with the recent Securities and Exchange Commission ruling regarding the Dodd-Frank Act’s “say-on- pay” provision. The provision allows shareholders of public companies the right to weigh in on executive compensation. This right will likely subject executive compensation packages to greater levels of public scrutiny. The impact of this heightened investor activism may also force compensation committees to reexamine compensation plans and address increased regulatory requirements.

A healthy relationship between directors and activist investors does not mean that directors cede complete control. But proactive engagement does mean that directors consider investor proposals seriously and articulate a clear a strategy for enhancing corporate value. As NACD has learned from its experience in convening investors and directors to discuss expectations and shared goals, it is important for boards to establish processes for shareholder communications. Specifically, boards should implement strategies for engaging large, long-term shareholders in dialogue about issues pertaining to the company’s future and corporate governance.

At NACD’s February 22 Virtual Roundtable, institutional investors and long-term shareowners spoke candidly with corporate directors about various issues, such as executive compensation. When controversial topics like executive compensation arise, independent directors—such as the board chair, lead director, or appropriate committee chair—should be a part of board communications with shareholders. This type of proactive board communication with shareholders can go a long way toward minimizing shareholder resolutions.

Of course, public battles with investors will erupt from time to time. To minimize the bad publicity and other fallout from these battles, boards must prepare themselves for crises ahead of time. A key step is for a board to understand the strengths and perceived weaknesses of its company’s structure and corporate governance policies. That allows the board to develop comprehensive plans that incorporate member responsibilities and provide a clear path for the company to present its direction to shareholders.

Activist investors cannot, and should not, be ignored. By addressing their concerns and making an effort to share common goals, directors can lessen the chance of confrontations with shareholders while promoting good corporate governance.

NACD Insight and Analysis: Communicating for Long-Term Value

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This week, NACD bridged the gap between corporate directors and the investors they represent. In conjunction with Broadridge Financial Solutions, NACD hosted a Virtual Roundtable at the Newseum in Washington, DC, bringing together leaders from the investment community with directors to discuss the disclosures and communication strategies.

Hosted by NACD President and CEO Ken Daly, the Roundtable featured investment community representatives from T. Rowe Price, CalSTRS, and Vanguard Group, Inc. They engaged in dialogue with board members from Forrester Research, Broadridge Financial Solutions, Kimberly-Clark, Legg Mason, SmartPros Ltd., and Assure Holding Corporation. With the intent to inform directors on what investors are looking for in the proxy in the upcoming year, the Roundtable discussion covered compensation, committee reports, and director qualification disclosures.

The investment managers represented at the Roundtable do not take a “check-the-box” approach based on guidance from proxy advisory firms; instead, they choose to complete their own analysis. Notably, these active shareholders emphasized quality over quantity with respect to disclosures in the proxy statement. Simply an increase in the amount of disclosures from companies only makes it more difficult for investors to uncover the valuable information in the proxy. The participating investors further suggested companies should make an effort to provide quality disclosures regarding how executive compensation matches performance, and how incentives are linked to the business strategy, for example.

The participating investors also stressed the improvements that need to be made regarding the new director qualification disclosures resulting from the SEC Proxy Disclosure Enhancement rules. They felt many companies did not fully explain how each director’s skill sets contributed to the company’s business strategy.

Lastly, the investors offered advice to the boardroom on director succession. After directors have analyzed their board’s composition in light of the company’s strategy, they find a larger challenge in recruiting directors to fill the gaps in skill sets. As a solution, Anne Sheehan of CalSTRS suggested that directors should “think of their shareholders as stakeholders.” Long-term investors have the same interests as directors and might be able to offer potential candidates whose skills complement the company’s business strategy and build its long-term value.