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Board/Shareholder Relations Thawing, But Hold The Kumbayah

Third Quarter 2013
Corporate Board Member
by Laura J. Finn

Although the pendulum has begun to swing on board/shareholder relations, it’s not in the middle yet. In the United States, shareholders do not have the same rights other countries enjoy, like proxy access, for example, but some investors at Corporate Board Member’s first Board/Shareholder Forum felt that more and more company boards are beginning to embrace the idea of meeting with investors—under certain conditions. Jonathan Foster, board director at Chemtura corp, Lear corp, and Masonite Inc., believes the Dodd-Frank Act is partially responsible for pushing the pendulum, and while he is happy to meet with his companies’ investors, he said that better rules of the road should be established to benefit all companies and investors. Natural tensions exist between boards and investors, obviously. Cindy Fornelli, executive director, the Center for Audit Quality, explained that these tensions are caused by three primary factors: unclear board roles and responsibilities, uneven performance from board to board, and the current construction of securities laws. The purpose of the forum was to provide board members, executive management, and a variety of investors an opportunity to share concerns, goals for the future, and ways to improve communication. Fornelli kicked off the event with what she called the four themes of the day: board reporting, board engagement, shareholders’responsibility to the board, and the various communication channels through which information is shared or withheld.

Leading off the conversation was a panel titled, “Director-Shareholder Relations: Defining the new normal.” With a mix of two investors and a director, the panel discussed how engagement is starting to become more of a norm, but all agreed there is still a long way to go. corporate Board Member Chairman TK Kerstetter asked the panelists to share what board members’ expectations of shareholders should be. They responded:

• to be given the space to focus on long-term value creation;
• to be allowed challenge investors respectfully;
• to ensure all conversations will be confidential;
• that shareholders will come prepared to planned meetings;
• that shareholders will give the company a fair hearing to
address problems; and
• to give kudos where kudos are due.
The group agreed both parties should:
• to have the ability to meet outside of proxy season; and
• to make an exchange of views normal—not something that
happens in bad situations only.

After laying the groundwork for both parties’ rights, institutional investors shared their expectations for boards. Quiet activism—that is, meeting with companies over a period of years and not publicizing the meetings, requests to management, or results—has been effective for TIAA-CREF. investors, consultants, and board members alike seemed to agree with this approach.

During the panel on corporate governance transparency, the panelists debated as to whether we have reached a shareholder-centric moment in history. Professor David Larcker, corporate director, Arthur and Toni Rembe Rock Center for Corporate Governance, Stanford University, said that historically, the corporate governance universe has been board-centric, but we’re now somewhat in the middle and moving into the shareholder-centric area, which he’s not sure is a good thing. Fellow professor Jeffrey Gordon, co-director, Millstein Center for Global Governance and Corporate Ownership, Columbia Law School, said he is puzzled as to why boards have given in on governance proposals. “How can we defer to you and trust you if you don’t stand up for what you think is best? Explain and defend your position rather than take the path to agree with shareholders.” James Copland, director, Manhattan Institute’s Center for Legal Policy, agreed with gordon and said that boards’ lack of defending their positions is further proof we’re moving toward a shareholder-centric model.

One of the topics raised in multiple sessions was the impact of shareholder advisory votes on compensation. Michelle Edkins, managing director and global head, corporate governance and responsible investment, BlackRock, said it’s frustrating that in the u.S., 60% of board time is spent addressing compensation issues, though related shareholder votes have very little impact on company performance. In contrast, a study she referenced showed that directors worry most about succession planning, an issue that does impact company performance. Brandon Rees, deputy director, Office of investment, AFL-CIO, noted during a different session that there is a correlation between compensation and performance and that red flags, like perquisites, tax gross-ups, and golden parachutes, trigger investor concern. While there have been substantive changes in compensation packages over the years, total amounts do and should matter.

During the final session, aptly named “Celebrating Good Governance,” each panelist shared his or her views on the hallmarks of effective boards. For panelist Brian Rivel, CEO, Rivel Research, the most important hallmarks include a board with a majority of independent directors, a company with separated chairman and CEO roles, and a board with diverse backgrounds and skill sets. he said that if the CEO or CFO is clearly communicating the strategy to shareholders, the board doesn’t need to do so. Warren de Wied, partner, Wilson Sonsini Goodrich & Rosati, said boards should not meet with investors to talk about financials, but instead should know what issues investors have and what they think. Finally, Anne Chapman, vice president, Fund Business Management Group, Capital Research and Management Co., said she believes it’s important for boards and management to be on the same page, and pointed out that there’s a difference between shareholder activism and shareholder engagement. The group wrapped after sharing their take on the best way to improve board/shareholder relations. Rivel told the directors in the audience to make sure they listen more than they talk during shareholder engagements, and Chapman suggested that board members try to remember that “we all have the same goals.” certainly, the goal for the forum, to put shareholders and investors together to discuss opportunities and challenges in a nonconfrontational setting, was achieved. Kumbayah to that.

Topic tags: board of directors, corporate governance, institutional investors, investor relations


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