Rob Swystun, Pristine Advisers
An increasing amount of shareholders and their representatives are wanting to spend some cozy one-on-one time with the boards of directors or other executives of the companies they’re invested in.
Regardless of whether a company is domestic or foreign, and even if an investment relations officer knows the company’s strategy inside and out and can confidently answer all questions potential investors have about the company, portfolio managers still often insist on physically seeing management at least once in a while.
In summer 2012, Rivel Research Group asked investment professionals in North America, Europe and Asia-Pacific who invest in companies abroad if they pressure companies in other countries to let them physically visit with management and, if so, to what extent they pressure companies for these face to face meetings.
An overwhelming majority — 98% — of investment professionals who invest internationally said they request to see company management at some point, with 68% stipulating the requirement that they see management at least once annually. Asia-Pacific-based investment professionals were the most demanding, with 83% requesting annual meetings with company management, followed by Europe-based investment professionals at 72% and North American investment professionals at 51%.
No amount of newsletters, phone calls or Skyping is going to be able to replace that tangible aspect of being able to shake someone’s hand and look them in the eye for the boost of confidence needed to maintain the commitment to a given company’s stock. There’s just something about that human interaction.
And even though it’s not actual face time with CEOs or senior management, many companies have started to release social media content that features their CEO in videos or blog postings so people can at least get the sense that they are hearing from someone at the top regularly, even if it is just a video or in writing.
The Center for Marketing Research’s annual social media study for 2012 found that 63% of companies in the Inc. 500 (the 500 fastest-growing private U.S. companies according to Inc. Magazine) have social media content that comes straight from the CEO.
Sometimes, though, it’s not the portfolio managers who are requesting meetings with top management, sometimes it’s the shareholders themselves who are requesting these meetings and they’ll go right to the top and request meetings with the board of directors of the companies they’re invested in.
But what do the boards think?
Based on a survey done by Corporate Board Member magazine, there was no real consensus among respondents about how they would respond to a face-to-face meeting request or demand coming from shareholders.
Roughly half the respondents answered that they would designate one board member (the sacrificial lamb?) to meet in person with investors. Another 14% of respondents said the entire board would meet with investors (strength in numbers?) and also about 14% said they would just deny the request altogether. The remainder of respondents said they would likely propose some kind of compromise like a telephone call or a written response from the board.
But why are shareholders becoming more assertive with company boards? Well, that can be traced back, at least in part, to requirements under the Dodd-Frank Act that now requires companies to hold shareholder advisory votes on executive compensation. Although the votes are non-binding, they have still given shareholders the confidence to actively try and get more up close and personal with the people making the decisions.
Shareholders don’t just want to talk executive compensation, though, they are interested in other governance areas and that includes positions the company takes on environmental and social issues.
Another reason that shareholders may want to meet with the board of a company is because they technically own the thing, so why not? The board just runs it. In essence it’s kind of like an employer wanting to meet with an employee (although I’m sure a lot of board members don’t see it that way).
“If shareholders want to meet with the board, you should meet with them,” says Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance and a board member at HealthSouth Corp. “To not do so would be like a congressman saying, ‘I refuse to meet with people from my district.’ Should you be careful? Of course. But you always meet with your owners.”
But are there any compelling reasons for a board not to meet with shareholders? There are.
Managers in companies could argue that they tend to know corporate operations much more intimately than the board members and that board members might not even be the best people to talk with to get information about the company.
In addition to that, directors talking with only certain shareholders — the ones who request it — risk being in violation of Regulation Fair Disclosure, which is the requirement that all investors receive access to important market-related information at the same time.
“Direct communication can be a slippery slope for a board,” says Elaine Eisenman, Dean of Executive Education at Babson College and a director for DSW Inc. Eisenman prefers written communication with shareholders rather than verbal communication with them.
“You risk losing some control in a face-to-face conversation,” she says.
However, shareholders who want to speak to the board of directors generally aren’t after sensitive information or anything that will give them a leg up. They’re more than likely just out to share their opinion on some kind of governance issue.
For example, Timothy Smith, who is a senior vice president at Walden Asset Management in Boston, recently participated in a phone meeting involving a small group of investors who met with George Lorch, lead independent director at Pfizer. The conversation centered around the possibility of separating the chairman and CEO roles at Pfizer.
“It was a thoughtful conversation, and (Lorch) provided us with some very helpful insights,” Smith says of the meeting.
Board members who do decide to meet with shareholders may find it helpful to set some parameters for the meeting prior to it starting, such as agreeing on what topics can and cannot be talked about. A lawyer or some other mediator can also be helpful.
Pfizer’s corporate secretary sat in on the meeting with Lorch and the investors and, as Smith explains it, “was free to step in if we got onto unacceptable turf.”
The majority of meetings with shareholders are harmless, though, and can actually be beneficial to both sides.
“Shareholders like to get assurance that someone they can see and touch is minding the store,” Elson says. “And frankly, the person minding the store learns a lot by talking with shareholders.”
Whether a board decides to act on these requests is up to them, of course, but as long as you’re careful, it’s never a bad idea to know what’s on the minds of your investors.