THIS IS PART TWO OF A SERIES: read Part One.
The ascent of activist investors and the need to adapt to board-to-investor communications are producing drastic changes in the way companies interact with their shareholders.
QUESTION > Institutional investors are demanding more process and access to board leaders. Traditionally, companies have avoided this at all costs. Is that still an appropriate strategy?
Lex Suvanto > Companies are actively thinking about how best to leverage their directors as part of their shareholder communications strategy. Traditionally, board members and companies have been averse to doing this at all. There have always been exceptions, such as when CEO succession or leadership compensation were in question, but now companies in all industries are thinking about putting board members into the mix to strengthen relationships with investors. I have heard and seen how a successful meeting between a director and an important investor can be very effective in terms of reinforcing a company’s strategy, future prospects, and the views of management. I would even say that it’s becoming a best practice to leverage directors in very targeted ways as part of an effort to articulate long-term strategy.
At the same time, this practice brings with it certain challenges. For example, which board member are you going to put in front of investors? How prepared are they? What are they going to talk about, and how is it different from what the CEO, CFO and investor relations head are talking about? You also have to decide which investors the directors are most relevant and helpful for.
Jason M. Halper > There are at least a couple of issues to keep in mind when companies are considering how best to approach board engagement. If you’re talking about the US and a public company, you need to be careful about disclosing material non-public information in the course of those communications, because of SEC Regulation Fair Disclosure rules. Whoever is doing the engagement needs to have a very clear sense of which information is and is not permissible to disclose. If you’re going to disclose non-public information, you need a confidentiality agreement from the shareholder.
As for outside directors, they are not going to be as familiar with the day-to-day activities of the company, so you would generally want to limit them to areas they’re familiar with – things like corporate governance, executive compensation, perhaps high- level strategy.
Chris Ruggieri > If you go back 10 years, we would routinely refer to institutional investors as “passive.” The reality today is that there is no such thing as a passive investor. It has always been important for companies to be engaged with their owners and to stimulate interest and demand, and we’re seeing more of that.
The advice I give our clients is that it is imperative for you to have a constructive relationship with your investors. You should have a regular calendar of interactions with them, and you should be listening closely to gather their input. You should be trying to find out if there are any misperceptions about the company or its stock, to understand if there is any misalignment in terms of expectations, and to get a general sense of their sentiment about how you’re running the company and their level of satisfaction.
I think the one area where debate continues is when it comes to who is responsible for interacting with shareholders. What we’re hearing from investors is that they want more direct access to C-suite executives, and some investors are asserting that the board should play a role in shareholder engagement, even though that’s not a routine board responsibility.
Increasingly we’ve seen letters from Vanguard and other large institutions regarding expectations of board engagement and board participation. I think we’re going to continue to have that discussion until we find a point of equilibrium, where investors are satisfied with the level of board interaction, and companies and board directors feel comfortable and confident that it’s the right balance.