Keys to Success in Board and Shareholder Communications
Plenary Session
Monday, October 20, 8:00 AM
| Richard H. Koppes | Director, Apria Healthcare Group Inc., and Valeant Pharmaceuticals International |
| Margaret (Peggy) M. Foran | Executive Vice President, General Counsel, & Corporate Secretary, Sara Lee Corporation |
| Bonnie G. Hill, Ed.D. | Director, The Home Depot and The Hershey Company |
| Dennis Johnson | Managing Director of Shamrock Activist Value Fund |
| Lizanne Thomas | Director, Krispy Kreme Doughnuts, Inc.; Partner-in-Charge, Atlanta Office, Jones Day |
Richard Koppes:
The corporate governance triangle has been turned on its head. There has always been communication between shareholders and management-and, as we learned last night, there are communications between management and the board. Today, we're going to look at communications between shareholders and the board.
Dennis Johnson:
Direct, constructive communication is important-and therefore should be a priority. There are two reasons: Long-term shareholders benefit from maximizing the value of the firm; and directors are accountable to shareholders.
| More independent |  72% |
| No real change | 23% |
| Less independent | 4% |
Total Responses: 346 |
|
An advisory vote on executive compensation is an effective tool to foster communication on the practices and polices the board is carrying out. The board can tell the story of how its practices reflect the values of the firm.
Regarding director nominations and proxy access-shareholders have lost a lot of value, and are not in a position where they can have input on board candidates. Boards should communicate with their largest shareholders on this.
A lot of progress has been made with regard to director independence and accountability-especially on majority vote and classified board structures. But there is still a lot of work to be done.
We've seen a lot of progress-but it's been slow. Boards should have a more robust process to communicate. A lot of the recent failures have resulted from poor communications.
Bonnie Hill:
I think there has been a customary approach to shareholder communication from companies-and it's usually from management. What I get from many colleagues is a mixed response as to whether the board should be more involved. No-the board should not be involved in operations and financial information. But when it comes to corporate governance, directors should be more involved. It should be with the support of management and the internal IR group-if a director gets out there and doesn't understand what they are doing, it can have bad ramifications.
| Yes | 55% |
| No | 45% |
Total Responses: 307 |
|
Who should be out there? Many boards designate one director. At Home Depot, we say the lead director should communicate. But there are situations when certain committee chairs should interface as well. It's important to recognize the various places shareholders are coming from. Directors are accountable to-and should be responsive to-shareholders.
I've been told by many activists and shareholders that open communications give them a chance to talk to the board. If there are strong feelings on executive compensation-or anything-the board should reach out before there is a say-on-pay proposal. The discussion should be before-the-fact: A simple yes/no vote doesn't tell you much.
Shareholders should be sought out by directors. After releases go out, there should be phone calls to certain shareholders to see how they feel. At Home Depot we have both a proactive and reactive approach.
Peggy Foran:
I previously headed up corporate governance at Pfizer-and Pfizer was one of the first to have a corporate governance department. We were able to see various trends and talk to shareholders over many years and look at best practices for the board. Directors were looking for feedback-"canary in the coal mine" kinds of things-for what was on the minds of shareholders.
| Yes | 87% |
| No | 4% |
| Unsure | 9% |
Total Responses: 342 |
|
Business and strategy are management-and absent some sort of crisis, it's not what boards should be talking about. But executive compensation, succession, and governance-that's what boards should be talking about. It occurred to the Pfizer board that as well as having emails and letters to the board, it might make sense to have a meeting with investors-those who really were aligned with long-term value-to hear what they have to say on governance. There were a diversity of views: Like boards, investors don't all agree that there is only one way to go. If you read the paper, you'd think every shareholder agrees say-on-pay is the way to go, but many investors say that "We just want a way to talk to you." Many agree that open communication would be better than say-on-pay.
There are 100 reasons not to talk to shareholders. But it takes courage to go beyond that. Most investors want to make sure you're working hard for them. There are very hard working board members-and communicating with them can show investors that you care, that you are loyal, and that you are diligent. The environment has radically changed. I've realized that say-on-pay and access to the proxy are coming. I can't think of any better reason to reach out, than to simply find out what are on your largest shareholders' minds.
Lizanne Thomas
Lizanne Thomas:
The prospect of communicating with shareholders raises concerns. I don't think Regulation FD is a real barrier-but it is a concern. There are other concerns: Having board members talk to shareholders, you run the risk of denigrating management. There's a risk of mixed messages. There's a risk of flood gates-if you talk to one shareholder, will you end up speaking to dozens? There are also concerns about undue empowerment and entitlement for shareholders.
So, after raising these concerns, I thought I'd go to the "Rules of the Road":
- If you're going to do this kind of communication-do it before you need it.
- Shareholder communication is not a right for every shareholder: Be selective about who you talk to and under what circumstances.
- Begin with management.
- Listen, rather than speak.
- If you do speak, be sure you are well-briefed and well-advised on current topics, as well as where you may speak-and where you should refrain from speaking.
- Beware the casual-the "cocktail party talk" when you may unintentionally be perceived as speaking for the company.
- Never go it alone-make sure you have someone else there-someone who is a listener and who can help you stay between the lines.
- Don't make promises or impose deadlines on yourself for a response.
- Don't float ideas which are not fully formed.
- Don't get into a continuum of contact: If you're going to have a meeting, have it, and don't let it turn into a series of informal meetings.
- After you've had an interaction, debrief well with management.
Rich Koppes:
I want to reference the brand new Blue Ribbon Commission on Board-Shareholder Communications . We spent many months-with 30-some commissioners-wrestling with these issues. There are four summary recommendations, and I'd like to cover those quickly.
- Attend and Participate in Annual Meetings. All directors should prepare to become more active members in the annual meeting. Board should consider having the chairs of the three key committees answer questions directed to the respective committee at the annual meeting, and by request throughout the rest of the year.
- Make Shareholder Communications a Board Priority. The subject of board-shareholder communications should be a regular agenda item at governance committee and board meetings, and should therefore appear in the board's annual work plan.
- Respond Appropriately When Investors Want to Talk. In general, boards should accept meeting requests regarding issues that could have a material impact on company performance or stock price.
- Consider Alternate Approaches to Greater Communication. Boards should consider using new and alternative approaches to reach a broader shareholder audience.
Audience Question: What is the proper channel of communication from shareholders to the board?
Dennis Johnson:
I think it's very difficult to have a communication with the board without involving the general counsel. But depending on the issue different directors might be involved-for example, you can't have a conversation about executive compensation without the chair of the compensation committee.
Plenary Session
Peggy Foran:
I think it could go through a variety of channels-but it's important to know the process. If I, as a corporate secretary, get a letter: Who gets that letter? You need to have clarification on "What types of issues" and "What types of shareholders?" The board is not management, and they are not IR. Pfizer had a meeting with their top 30 investors. They thought this was an efficient way to do it. If they got a shareholder proposal, the chair of the compensation committee might meet-with management-with the investors.
As head of corporate governance, I would often talk to shareholders-and it wouldn't have to go to the board when it was made clear that the issue wasn't applicable, or that there were clear guidelines in place. But it's different for every board.
Audience Question: Define "shareholder" when determining who should be involved in communications-and who should not?
Peggy Foran:
There are only so many hours in the day-and you need to choose wisely. Some boards just talk to their top shareholders because they don't have time. Wealth does have its privileges-if you have a 5% shareholder, you're going to take that phone call from them. It's going to be different in a crisis situation, of course. But the decision of who you're going to talk to really has to be a board decision. I've had shareholders say, "We want the full board there for a six-hour meeting." I'm not saying that not all shareholders are important-they are. But the directors' time is valuable, and you have to choose wisely.
Bonnie Hill:
I would add one thing: Look at your long-term shareholders and long-term investors. Every shareholder is important, but you really appreciate the longer term shareholders.
| Yes | 73% |
| No | 27% |
Total Responses: 333 |
|
The chair/CEO should be the first point of contact. Then I think there are directors who might be clearly involved-such as the chair of the compensation committee for compensation matters. But it's important to identify in the boardroom what kind of communication will take place-and who will do what.
I don't think shareholder communication is for every director-not everyone can sit across from a shareholder without getting angry and pissed off-and not
everyone can see the value that can be derived.
Audience Question: There are a lot of questions on Reg. FD. How do you work with that?
Peggy Foran:
Essentially, you can't give material non-public information to your investors. At Pfizer, I told the directors what they couldn't say-though most of them already knew. I talked to the investors, and told them what they couldn't ask. And to be honest-none of them did ask. They were really interested in talking more about process: CD&A, performance measures, say-on-pay, and access to the proxy. These are not material, non-public information. In all the years I was doing governance, I can't think of a governance investor (as opposed to an analyst) who was asking questions that might cause directors to violate Reg. FD.
Lizanne Thomson:
About 90% of your mission-if you elect to do this-will be for you to be a listener. On the remaining 10%: Be well-trained, and have someone in the room who will know if you do cross the line.
Bonnie Hill:
In my experience, it was not 90%. We had a fair exchange: 50/50. The shareholders wanted to know what our process was-no matter what the group. Despite the 50/50 sharing and listening exchange, I never did experience any Reg. FD problems.
For More Information:
- NACD's full recommendations for setting a board-shareholder communications policy and procedures are available in our latest Blue Ribbon Commission Report, which was distributed to all conference participants.
Article: Board-Shareholder Communications: The Time Has Come - Organization: The Shareholder Communications Coalition
