SHAREHOLDER ENGAGEMENT: A BALANCING ACT
Last May, Corporate Board Member surveyed more than 300 public company directors to take their pulse on the practice of shareholder engagement amid today’s boardroom reality. As proxy advisory firms continue to gain influential ground and push for new governance practices, board members shared their mixed reactions as to whether their oversight responsibilities should mandate regular communication with shareholders outside of the annual meeting and quarterly earnings calls.
What our survey uncovered is that while the number of companies that have initiated communications with their key stakeholders has been increasing steadily over the years, only a slim majority (55%) of the public directors surveyed reported having had direct engagement with investors within the previous 12 months, outside of the regularly scheduled calls and meetings. In addition to such engagement distracting from their oversight duty, many view shareholder-director communications a compliance risk—a finding that is not all that surprising, as our survey revealed 41% of directors say they still need clarification on certain areas of Regulation FD.
In the meantime, however, the SEC has repeatedly encouraged board/investor communications; having a well-thought-out outreach program adds credibility in the face of mounting pressure from institutional investors and proxy advisory firms and allows shareholders to experience firsthand the attention and importance the board and leadership team confer to their proposals, concerns, and inquiries. It can also minimize the potentiality of activists suddenly emerging, since, as one director in our survey sagely noted, resolution of disagreement requires communication.
If shareholder engagement helps reduce the likelihood of activism, our findings nevertheless reveal that most directors lack preparedness in that regard: While 62% believe it is helpful to undergo “think like an activist” training to identify vulnerabilities, 75% say their board has not done so. Preparation in the face of activism, or of any investor disagreement for that matter, is as critical as it is time sensitive. Promptly discerning opportunities to improve performance in the short term and appease certain investors before doubts arise and without sacrificing the long term is crucial. Regularly engaging with major stakeholders on their main concerns may very well be the best first line of defense, and one public directors and leadership teams need to take more seriously.
Notwithstanding, several of the respondents implied in their comments a certain weariness with having to deal with an increasing number of what are often regarded as illogical or utopian considerations, such as tenure, gender, and overboarding mandates. As demands to optimize boards and their processes have been intensifying on all fronts, one director noted that his biggest concerns involve the mounting expectations of regulators, proxy advisory firms, and activists—and the liability that ensues. While some issues raised by shareholders and proxy advisory firms are warranted and have been shown to improve board efficiency and performance, directors say they often cloud more pressing agenda items, taking away from strategic discussions.
But it is particularly in light of this growing pressure that there has never been a more critical moment for all parties to sit down, have an open dialogue, and clarify everyone’s role and viewpoints, to the long-term benefit of all shareholders.