Shareholders Tell Directors to Speak Up
from
November/December 2007
by Randy Myers
Effective corporate board members must bring an arsenal of talents and character traits to their jobs: business acumen, diplomacy, discretion, honesty, courage, public speaking. Public speaking?
Yes, shareholders are increasingly demanding to hear from board members. Roger W. Raber, senior adviser and former CEO of the National Association of Corporate Directors, says that while members of the board have long been expected to attend annual meetings, “now they’re much more likely to be getting up and responding to issues, rather than letting the CEO do it.” Management continues to field most of the questions, he says, “but you have the directors being challenged as well.” What’s more, says Raber, the pressure on board members to provide articulate answers is not limited to annual meetings. A task force jointly representing the NACD and the Council of Institutional Investors has recommended that directors communicate with shareholders on some sort of regular basis, whether electronically or in person with the CEO present.
Some shareholders are pushing for opportunities to talk one-on-one with independent directors about governance and social issues, as well as corporate performance. “As shareholders, you and I hire these people,” says Scott Mitchell, CEO of the Phoenix, Arizona-based Open Compliance and Ethics Group, a nonprofit organization that promotes good governance. “They’re there to represent us. The idea that
they shouldn’t talk to us seems a little outrageous.”
It does happen, though. Michael Boskin, 62, who was chair of a board committee that deals with environmental issues for Exxon Mobil, declined repeated invitations to meet with institutional shareholders on the issue of climate change. Directors can be reluctant to talk at annual meetings, too. At General Motors’ meeting this year, George Fisher, 66, chairman of GM’s directors and corporate governance committee, deflected questions about governance issues to chairman and CEO Rick Wagoner, who’d earlier referred the questions to him. The relay disturbed the questioner, private investor and activist shareholder John Chevedden. “They worked together to not really answer anything,” he says.
Last year all of Home Depot’s directors famously stayed away from the company’s annual meeting, a shareholder-relations gaffe that many believe sealed the departure of then-chairman and CEO Robert L. Nardelli. This year his successor, Frank Blake, 58, directed the 12 board members to show up, and all but one, Milledge A. Hart III, chairman of Hart Group, made it. They mingled with shareholders before the meeting, and the nominating committee had a sit-down with a group of institutional shareholders led by the American Federation of State, County and Municipal Employees pension fund.
Most directors agree that they should be available to shareholders at the annual meeting. But they also feel that unless the circumstances are unusual, any further communications are generally best left to management. “What are you going to tell them?” asks Larry K. Powers, 65, chairman and CEO of Genlyte Group Inc., a Louisville, Kentucky-based maker of lighting fixtures and controls. “If you tell them anything significant about the company, you’ve got to make sure that’s public information.”
“That’s the whole reason the [Securities and Exchange Commission’s] Fair Disclosure regulation was put into effect,” agrees Donald C. Wegmiller, 69, former chairman of Clark & Wamberg Healthcare Group of Minneapolis, a consulting firm, and a member of the boards of Mountain View, California’s Omnicell Inc., which provides management systems to health-care facilities, and Minneapolis-based Possis Medical Inc., a manufacturer of catheters and other medical products. “Why should one shareholder or analyst be given certain information? That would violate the regulation.”
Matthew W. Kaplan, 49, a management consultant who serves on the board of insurance company Penn Treaty American Corp. in Allentown, Pennsylvania, says he recognizes that he works for shareholders, not management, and isn’t averse to communicating with them, especially on issues of governance. But he is careful about discussing certain matters. “Let’s say I get a phone call from a shareholder about a compensation issue,” Kaplan explains. “I’ll mention it to the compensation committee chair and also to the CEO, because he needs to know what the pulse is.”
Wallace W. Creek, 68, retired corporate controller at GM and now a director of Deerfield, Illinois, fertilizer manufacturer CF Industries Holdings Inc. and Amherst, New York, building-equipment maker Columbus McKinnon Corp., takes a similar approach. “If a shareholder called me and said he was unhappy with management, I would ask why and tell him we’ll discuss it at our next board meeting and that we’ll get back to him after that,” says Creek. “An independent director shouldn’t be making independent decisions without a full airing to the board.”
Renowned corporate attorney Martin Lipton of the New York City law firm Wachtell Lipton Rosen & Katz says directors are right to limit—but not rule out completely—direct communication with shareholders. “Clearly, no director should ever talk to shareholders about how the company is doing and run the risk of inadvertent disclosure of inside information,” he says. “On the other hand, not infrequently these days a situation will develop where a company is under attack by another company trying to take it over, or by an activist hedge fund. Under those circumstances, it may be quite appropriate and helpful for one or more of the independent directors to meet with institutional shareholders to explain what the board’s thinking is about whatever the issue happens to be.
But that should be done with the cooperation of the management. Not with management present, but with their knowledge.”
Wegmiller says he occasionally receives, and dismisses, calls from hedge funds claiming that they just want to get his view of things and aren’t seeking nonpublic information. “Of course they are,” he says. “If they weren’t, they could just read the 10-Qs and the 10-Ks and know what’s going on. That’s not what they’re seeking. They’re seeking more information than the other shareholders are getting. And our society has decided that’s not fair.”
Which certainly seems fair enough.
