Engage With Shareholders–It’s Good for You!
Perhaps you were forced to eat broccoli as a kid, but later ate it voluntarily when no one was looking and you realized it didn’t taste so bad—and it provided valuable nutrients for your body to boot. The evolution of boards is not unlike the evolution of a child’s palate. Standards that must first be imposed from outside sources are later internalized once their value is appreciated. Viewed through this lens, corporate boards are clearly coming of age.
First, there was the evolution of board composition itself. Not all that long ago, boards were chiefly comprised of white males, mainly CEOs, from similar backgrounds and with similar perspectives on issues. Demands by vocal external groups, including the media, for greater diversity on boards yielded slow progress. But in the far more complex world that is today’s global business environment, the most indemand directors are those who bring a variety of perspectives, experiences, and strategy-specific functional expertise to boardroom discussion and decision making. Boards began to recognize the value of greater diversity on their team when the strategy called for something different, rather than more of the same.
Shareholder engagement made its way onto the governance scene in a serious way when activists and institutional shareholders began demanding not only an unfiltered look behind the traditionally closed boardroom doors, but also for the ability to provide input on strategy, board composition, compensation, and a host of other issues. Pushed by these outside forces, boards grudgingly recognized the need for greater transparency and communication with investors.
It would be hard to overestimate the significance of this movement. As authors Arthur F. Golden, Thomas J. Reid, and Laura Turano note in their introduction to Getting the Deal Through: Shareholder Activism and Engagement: “At the end of another record-breaking year for shareholder activism activity…we believe that shareholder activism is and will remain in sharp focus in financial markets, in the Csuite and in the boardroom, and that shareholder engagement is, and will continue to be, a leading and increasingly sophisticated priority.…[A]ctivism and a heightened sensitivity to shareholder engagement is truly a global phenomenon.”
Given the critical importance of shareholder engagement, all boards should consider a shareholder communication plan that enables them to:
- Tailor communications. Whether dealing with activist shareholders or other groups, first make sure you understand their interests, their perspective on the company, and what they hope to gain from their investment. Particularly with activist shareholders, decipher what their agenda is—board composition? strategic direction?—and then be ready to discuss. Determine an overarching, consistent message from the board, and tailor specific communications to individual groups.
- Present a united front. Investors as well as the media may look for different points of entry into a board when they are seeking information. The board should speak with a single voice and be aligned on its understanding of the strategy. In addition, there should be one designated spokesperson who communicates on behalf of the board to outside groups.
- Get out ahead. Be prepared to proactively address any areas of concern—missed earnings estimates, for example—and a plan for getting business operations back on track. If you leave a communications vacuum, you are providing activists with a prime opportunity to move in. And don’t be afraid to push back with alternative
scenarios and explain why these scenarios are in the long-term interests of investors.
- Plan for regular contact and followup. Shareholder engagement is a process, not a one-time event. Plan for regular touch points to connect with key investor groups. One lead director we know says she plans these meetings to fit her travel schedule, asking to drop in for a visit if she will be in the area, but how it’s done is up to you.
Finally, remain open to constructive input, and don’t even consider stonewalling an influential investor. Think of these interactions as opportunities to gather constructive input, which you may even learn to appreciate—like your broccoli—once you recognize how valuable it can be to your organization.
Originally appeared in NACD's Directorship magazine July/August 2016 issue.