Thursday, July 24, 2014

Connecting Shareholders And Boards In The 21st Century

kdmblogconnectCompanies not talking to customers? School teachers not talking to parents? Management not talking to employees? Ridiculous! We know these statements aren’t true because each one contains a claim that contradicts a fundamental relationship necessary for the institutions’ survival.

In this age of transparency and electronic communications, it was distressing to read in The New York Times, “Investors to Directors, ‘Can We Talk?’” (7-22-2014) that some of America’s largest institutional investors, managing more than $10 trillion, lamented the disconnect between Boards of Directors and companies in which they invest. The discomfort surfaced in a letter to more than 1,000 of America’s largest companies. After all, shareholders own these publicly traded companies. And aren’t the Boards of Directors responsible for ensuring that they are run for their owners’ benefit?  It’s another fundamental relationship.

The letter wasn’t signed by a bunch of hot-headed activists. Most of the signatories are pension funds and solid institutional investors with the long-term orientation that companies seek out as shareholders.

How did this disengagement arise? The article attributes its origin to a statement found in the Conference Board Governance Center Task Force on Corporate/Investor Engagement. That Task Force report said, “We endorse the principle that direct engagement involving directors should not be a routine method of engagement for most US companies and for most investors.”

It’s discouraging, if not downright shameful, on two levels:  first, that a national organization would write these words; and second, that so many company leaderships should sanction it either by action or omission. One reason for this lack of directors-shareholders engagement could simply be that opinions and information provided by shareholders would complicate the lives of directors and management. But shareholders do have a window on many companies. Do Boards and managements have something to learn from them? After all, shareholders want the best possible return.  (I’m setting aside activist, break-‘em-up investors who aren’t interested in a both a long-term investment and a long-term company.)

The original rules for Boards of Directors engaging with investors were set in the 1930s. Ticker tapes. Paper proxies. Paper settlement of trades. A communications Stone Age.  The market has evolved both in structure and communications. After the Enron and Worldcom scandals in the early 2000s, Boards of Directors were reconfigured, requiring the identification of a Lead Director and special qualifications to head the Audit and Compensation Committees. I’d suggest a Communications Director, but there are 7,000 listed companies, and I’m not sure the pool of qualified executives with investor relations experience is big enough.

Policies need to be developed for companies to use today’s technology and transparency to connect directors and investors.  Practically speaking, it could work this way: five or six months after the Annual Meeting, companies could take questions for the Board of Directors by e-mail for two weeks from registered shareholders.  The Board could answer them and post on the company’s website. This way, all shareholders get the questions and answers, and there’s no favoritism.

Would every question be answered? No, that’s impractical, both because of volume and the danger of disclosing material non-public information. But an effort would be made to answer as many as possible. Would it be a “routine method of engagement?” No, it would be periodic.

But it would bring shareholder-director communications into the 21st century.