Guidance for Director-Shareholder Engagement
by Philip Richter | September 25, 2014
The discussion about direct shareholder-director engagement has never been livelier. Large institutional investors have articulated their desires for increased shareholder-director engagement. As more investors become interested in the prospect of communicating directly with boards, it is important to consider the framework for those discussions. Philip Richter is co-head of the mergers and acquisition practice at the international law firm Fried, Frank, Harris, Shriver & Jacobson, where he represents clients in M&A transactions involving both public and private companies, proxy fights, and unsolicited proposals. Here, Richter answers questions about the when, who, and how of director-shareholder engagement.
How do you decide when to engage with shareholders?
Due to time constraints, it is not feasible to meet with every shareholder that requests to engage with the board. A screening process should take place to determine which shareholders to engage. In determining whether to meet with a requesting stockholder, directors should consider a variety of factors, including:
- the topics proposed for discussion;
- what the company can expect to achieve as a result of the engagement;
- the requesting stockholder’s profile (e.g., assets under management, share ownership in the company, period of time as a stockholder, history of voting and engagement with the company, general approach to investment and corporate governance, and propensity to engage in various forms of activism);
- stockholder’s overall interest in the proposed subject matter and the frequency of management or board engagement with stockholders on such matters;
- whether other stockholders are requesting similar engagements, and if so, what their profiles are; and
- the company’s vulnerability to an activist campaign and whether the board is faced with stockholder agitation (including a potential proxy fight) from activists or other investors.
If during the screening directors determine that engagement is not appropriate, the screening members should discuss with management and other directors, as applicable, an appropriate response to the requesting stockholder and the person to deliver the response.
How do you decide who does the engagement?
If the board determines that directors should meet with stockholders, they then need to decide who should participate in the interaction. The board should:
- select the directors based on the specific topic to be discussed and the directors’ experience, expertise, board role, and past relationship with the stockholder requesting the engagement (e.g., the chair of the compensation committee is likely to be the appropriate director to address matters relating to executive compensation, or the chair of the nominating and corporate governance committee is likely to be the appropriate director to address governance or executive management-related matters);
- determine whether any of the company’s executive officers should participate in the engagement; and
- select a director or member of management to be responsible for coordinating the engagement.
Having outside advisors such as legal counsel, investment bankers, or consultants attend stockholder-director engagements is generally counterproductive. Other than in the context of an unsolicited activist approach, the inclusion of professional advisors in meetings with shareholders should be rare except when requested and then agreed upon by both parties.
How should you prepare for the engagement?
In preparation for the meeting, participating directors should:
- review relevant materials concerning the stockholder (e.g., the stockholder’s corporate governance guidelines, proxy voting policy, and history with the company) and the topics to be discussed;
- be advised of any sensitivity as seen by management;
- seek appropriate training on legal and business issues relevant to the subject matter of the engagement; and
- coordinate the message points with management and the board as a whole to avoid confusion or contradiction in the company’s public posture.