Communicate to investors or be regulated. That was the warning issued last week by Ira Millstein, the dean of corporate governance and senior partner at Weil Gotshal & Manges.
“If corporations don’t begin to open up and discuss compensation, we’re going to get a ’say on pay’ law in the next administration,” Millstein advised corporate attorneys at the annual American Law Institute-American Bar Association conference on corporate governance. Say on pay, shareholder access which presumably would give long-term institutional investors additional influence in director elections, and majority voting policies are all likely to be acted on by a new presidential administration supported by the Democratically controlled Congress.
To thwart these restrictions before they can be legislated, Millstein urged companies to establish communication and election policies that help investors better participate in governance.
Board members have in many cases been reluctant to speak to investors because of Reg FD, a rule that requires an executive or director who discusses nonpublic material information with an investor to make a prompt public disclosure of that information. Millstein argued, however, that as long as the discussions focused on governance issues and not earnings-related subject matter, these conversations are imperative.
“Companies may worry that any executive or director who communicates, directly or indirectly, with a shareholder or group of shareholders could accidentally disclose material information, forcing the company to make a prompt public disclosure,” Millstein said. “Counsel should advise their clients that Reg FD is a caution, not a barricade. They should sit with the boards and design “shareholder communication” procedures tailored to suit the best interests of the company given its size, shareholder base, past governance issues and the like.”
Millstein added that executives and independent directors on boards must consider the widely divergent time horizons and investment objectives of investors in discussions with shareholders. He recommended that companies learn who their investors are, find out what issues they care about and send a lead director together with the company’s counsel to communicate with shareholders.