Rob Swystun, Pristine Advisers
Company directors have long shunned interaction with shareholders, but those same shareholders are trying to change that.
It’s not that directors are being antisocial jerks. They’re actually told not to talk with shareholders by their own organizations:
“We endorse the principle that direct engagement involving directors should not be a routine method of engagement for most U.S. companies and for most investors,” says the Conference Board Governance Center Task Force on Corporate/Investor Engagement.
Directors also have legitimate reasons for not wanting to meet with investors, as reported by Andrew Ross Sorkin in the New York Times’ DealB%k.
The reasons may include:
- Company management usually meets with the company’s largest shareholders and thus directors don’t see it as their duty.
- Some directors believe individual meetings with investors will undermine the company’s ability to speak with one voice.
- Often, directors are worried they might accidentally disclose sensitive information.
- CEOs can be insecure about having shareholders talk directly to directors, worrying that shareholders might have too much influence on directors (and take influence away from company management).
According to the Harvard Business Review, there also may be some mistrust at play.
“Many top executives seem to think that board members cannot be trusted with such interactions,” the Business Review says. “Yet if directors cannot be trusted to meet with and listen to shareholders, how can they be expected to competently govern a corporation?”
And therein lies the problem. Sorkin compares it to a hypothetical situation where lawmakers are voted into office but never speak to the very constituents who voted them in, which is exactly what is happening in corporate America where shareholders vote board members in, but never get a chance to talk to them.
But that’s about to change if one group has its way.
Recently, at least 1,000 chairs of large, public companies in the United States received a letter from a group of shareholders who represent more than $10 trillion in assets.
The letter had a single demand: Talk to us.
The letter was signed by representatives of investment groups like BlackRock, Vanguard and Calstrs, heavy hitters in the investments world. Collectively, these shareholders call themselves the Shareholder-Director Exchange and they want directors to be more talkative.
“Engagement between public company directors and their company’s shareholders is an idea whose time has come,” wrote the group. “We believe that U.S. public companies, in consultation with management, should consider formally adopting a policy providing for shareholder-director engagement.”
As Sorkin points out, these aren’t activist investors stirring the pot here. These are institutional investors who have traditionally supported whatever a company’s board has recommended without so much as a peep. But now, those same investors want a dialogue.
To facilitate this burgeoning romance between directors and shareholders, the law firm Cadwalader, Wickersham & Taft and the corporate advisory firms Teneo and Tapestry Networks created the aforementioned Shareholder-Director Exchange, a group that wants to help get this party started.
To that end, the group has drafted the SDX Protocol, a set of guidelines meant for public companies to adopt and publish that addresses the appropriateness of director and shareholder engagement.
“The guidelines suggest that companies decide under what circumstances a shareholder’s request to meet with directors should be granted: to discuss the board’s composition or management performance, for example,” Sorkin says. “The point is that companies should decide, in advance and transparently, how they plan to communicate directly with shareholders long before a proxy fight were to develop.”
While transparency is generally touted as a good thing, it does come with some disadvantages, too. The biggest pitfall with director/shareholder communication is that if a board were to hypothetically become too enamored with a particular view from a set of shareholders, it could lead to short-term thinking that undermines long-term performance.
Sorkin cites a recent study by the Institute for Governance of Private and Public Organizations that dissected a series of other studies on shareholder activism and determined that “the most generous conclusion one may reach from these empirical studies has to be that ‘activist’ hedge funds create some short-term wealth for some shareholders as a result of investors who believe hedge fund propaganda (and some academic studies), jumping in the stock of targeted companies.”
But, there is also the problem of unfair access because while large investors who hold a lot of sway will almost certainly get the opportunity to meet with directors, small retail investors who hold little sway almost certainly never will.
Is all the talk of shareholder/director dialogue just talk? According to the aforementioned Tapestry Networks, it may be.
Tapestry says that at a conference, Nestlé’s executive board member David Frick “talked about a program to invite its largest shareholders to meet with the chairman in various cities in the U.S. and Europe. He said shareholders had either declined or simply didn’t turn up to the meetings.”
That’s just one company, though. But, Sorkin says last year’s proxy season revealed only a quarter of the companies in the Standard & Poor’s 500-stock index “publicly reported engagement efforts or policies in their proxy statements,” according to the Shareholder-Director Exchange.
In this age of increasing shareholder activism, it seems that shareholders are going to have their voices heard one way or another. Do they really want to be heard is the question.