Rob Swystun, Pristine Advisers
Investors are more interested in high quality communication than high volume communication, according to the recently released report Investor Perspectives: Critical Issues for Board Focus in 2015.
It seems that after years of trying to get more communication from companies, investors are now turning their attention to the quality of that communication. And good quality communication means explanations of why a company does the things it does.
There are tricks and gimmicks to fatten up any kind of writing, such as proxy reports, but investors are having none of those. They just want the important stuff.
“Laundry lists and boilerplate statements about good governance just add length without adding very much meaning,” the report quotes one investor as saying.
No longer is it enough for a board to merely say it heard something from shareholders so it took action. Shareholders want to know why the board thought taking the action was appropriate beyond just appeasing shareholders. All major board decisions, regardless of whether the investors are in favor of them or not, need explanation to accompany them.
Even if a board makes a decision that goes against general investor sentiment, providing the rationale for that decision gives the board credibility and helps to establish investor confidence. Conversely, lack of disclosure — particularly on contentious issues — is a huge red flag for investors.
“Outliers really stand out to investors these days,” another investor quoted in the report says. “If you’re an outlier on a particular issue, it’s best to own it. Either provide a rationale for why the board believes its position is the right one, or outline how you plan to fix it.”
Another area that behooves more explanation is the evaluations that boards are doing. While shareholders seem pleased with the amount of evaluation that is going on, there is often a dearth of disclosure about the evaluation process and the intended outcomes of it.
And while investors appreciate their one-on-one time with boards, they’d like to see one-to-many forms of communication, too, that go beyond just the proxy disclosure. Investor days or video interviews with board members on the company’s website are a couple of suggestions that companies could use for this one-to-many type of communication.
So, just who are these investors who said these things?
They’re major U.S. institutional investors who the National Association of Corporate Directors (NACD) held discussions with in September and October of this year about what governance issues boards should focus on in 2015.
The full report, along with the full list of the institutional investors who took part, can be downloaded here.
To help make 2015 the year of quality communication, the NACD encourages companies to ask themselves these questions:
- How well does the board understand the specific priorities of our company’s top shareholders?
- Do we know how our board’s governance practices compare to those of our peers?
- Have we communicated the rationale behind the board’s decisions in areas where our major investors are likely to have questions?
- Do we have opportunities to receive feedback on governance and board leadership issues directly from shareholders, or is input on these matters provided to the board solely through management (e.g. the CEO, general counsel, investor relations) and/or through external advisors?
- Do the board’s discussions about investors’ governance priorities tend to focus on the views of the company’s own shareholders, or the policies of major proxy advisors (ISS, Glass Lewis, etc.)?
- Do our investors understand how the board provides oversight and guidance to management on business strategy and the oversight of risks, with an eye to medium- and long-term performance?
- Do our investors understand how we evaluate our performance—at both the full-board and individual director level—and how we act on the results of performance evaluations?
Will 2015 be the year of quality corporate communication? Only time will tell, but if this report is anything to go by, investors don’t want any fluff in what they get from companies, just the facts.