At recent forums on governance, a number of board advisors have intoned mightily against the notion of having corporate directors involved in a company’s shareholder engagement efforts. The foremost rationale offered for holding directors apart from discussions with investors is that Regulation FD creates insurmountable problems for companies whose directors could potentially be involved in engagement and outreach to shareholders. While there are legitimate concerns about the shareholder engagement process for company officers and directors, fear of Regulation FD need not be among them–if due diligence and care are properly undertaken.
To be clear, Regulation FD requirement can create difficulties for companies in communicating with investors, but engagement with shareholders can be much different than the relationships companies maintain with equity and credit analysts. Whether you need to have your board members involved depends on the answer to four questions:
- Who is the shareholder making the request?
- What are the circumstances surrounding the engagement request (or need)?
- Will director involvement add value?
- Which director or directors need to be involved?
Answering the Questions
Your answers will dictate what level, if any, of director involvement is required in the engagement process. Yes, engagement process. A company’s decision to sit down with shareholders and enter into a constructive dialogue should be part of a process that takes into account the company’s management culture, by-laws and corporate governance guidelines. A review of board governance and general corporate governance for issues that might be flagged by shareholders can provide a much-needed road map for potential engagement. Your firm’s corporate secretary, general counsel and outside counsel and advisors should be involved in every step of the decision-making process because engagement should not be equated with abandonment of counsel. And it goes without saying that counsel should be involved in preparing executive management (CEO or CFO) and directors for any discussion or meetings with shareholders.
Who is making the request and why?
Has the request for a meeting with the company come from an individual shareholder “gadfly,” an activist institution such as the New York City Comptroller’s Office, Connecticut State Treasurer or AFSCME, or Nelson Peltz’s Trian Partners? Your response to the request and concerns about FD will be different for each. A gadfly shareholder, with a few hundred shares, should not get the same level of management attention as a public pension, union fund or an activist investor. For prospective meetings with a public pension or union fund, the participation of a director may be merited by the subject matter to be discussed. These shareholders, while concerned with financial performance, usually are focused on governance or social responsibility issues they believe impact the corporate bottom line. Discussions with activist investors, such as hedge funds, are usually focused on current strategy, financial performance and operations; given the subject matter, engagement with these activists needs to be more closely monitored for potential FD breaches.
What are the circumstances surrounding the engagement request (or need)?
What issues are creating the need for engagement? For example, a recent story in the Wall Street Journal discusses Goldman Sachs’ engagement with Connecticut State Treasurer Denise Nappier and social issue proponents regarding executive compensation and bonuses. In reviewing the story and accompanying links to the correspondence between Goldman and the funds, there is communication between the compensation committee chairman and the activist institutions. In this new governance paradigm, activist institutions with compensation concerns might seek to meet with the chair of the compensation committee to understand the process used by the board and the philosophy behind the rationale stated in the proxy statement. Some investors prefer to meet with board members rather than management–often viewing management’s defense of the company’s compensation processes as self-serving.
In the case of hedge funds, they are very often looking for dialogue with the board. This is especially true where the fund’s goal is to obtain board representation. Hedge fund activist may seek to be seriously considered by the nominating and governance committee. As stated above, much greater care around Regulation FD needs to be taken under these circumstances as the questions from hedge fund managers tend to focus more deeply on operations and execution of current strategy. These types of dialogue have the potential stray into areas that cross the lines set by Regulation FD.
Will director involvement add value to the shareholder engagement process?
In the instance where a company is seeking shareholder support for its compensation practices or providing clarity around board governance processes, director involvement may not only make sense, but has the potential to lead to the establishment of a better relationship with the shareholder. Keep in mind that engagement does necessarily mean there will be agreement between the company and the investor, but an open dialogue with a board member could create a greater sense of trust even when the parties agree to disagree.
Who from the board should be involved?
The “who” will be largely determined by the issue in question. Discussions of strategic planning, executive compensation, and succession planning are usually more about process than the details of operations, the profitability of specific divisions or the names of potential successors in an envelope. There may be questions from shareholders about past actions taken to provide color. Exceptions might include questions on global sourcing and use or review of foreign contractors in discussions of human and labor rights with social issue proponents. In these instances, the activists usually have detailed information to bring to the table and are seeking to understand what actions the company is willing to take to end and remediate the alleged poor behavior. The resulting dialogue may be so granular as to exclude director participation from the outset. However, the majority of these issues of concern could be discussed by the lead director (or non-executive chairman) or broken out by subject matter for the appropriate committee chairman. Directors who chose to participate in the engagement process should be fully briefed on the range of questions they may face from the shareholders, as the corporate secretary/general counsel in pre-meeting discussions with the activist have agreed upon an agenda. A pre-meeting discussion allows both the company and activist to know the boundaries and Regulation FD type questions about earnings expectations or projected inventory levels can easily be understood by both sides as out of bounds.
With the SEC having proposed more rigorous disclosure on compensation and risk, as well as on the role and skill sets of incumbent director nominees, board members will find themselves potential much more involved than ever more in shareholder engagement and outreach efforts of their companies. Given the trend, Regulation FD need not be an obstacle to director participation. Careful planning and pre-meeting negotiation with shareholders can provide for a director engagement process with shareholders that can foster trust, if not agreement.
Francis H. Byrd is managing director and co-leader of the corporate governance practice at The Altman Group, a proxy solicitation and advisory firm.