August 17, 2016
This is the second of a three-part series on board engagement. This post is written from the perspective of a public company board member.
Gina France is President and CEO of France Strategic Partners LLC, which provides strategy and transaction advisory services and special project consulting to corporations. She has over 30 years of strategy, investment banking and corporate finance experience and is a 15-year veteran of Wall Street. She serves on the boards of several public companies, including CBIZ, Inc. (NYSE: CBZ), Cedar Fair L.P. (NYSE: FUN), and FirstMerit Corporation (Nasdaq: FMER).
Clearly, most boards take their fiduciary duties very seriously, understanding that they are accountable to shareholders and responsible for increasing shareholder value. Yet many boards remain reluctant to actively engage with shareholders, even though research indicates that investors strongly support engagement with directors. What is constraining boards from having more dialogue with investors?
A number of factors may be in play. First, the relationship between boards and shareholders historically has been one of little direct communication. If and when communication did occur, it was often over a problem or contentious issue. So the thought of dialogue with shareholders may conjure up images of negative events, and some directors may feel like it is fraught with “downside” risk. However, as more companies demonstrate success with ongoing and proactive shareholder engagement, and as board refreshment occurs over time and reluctant board members are replaced with new directors, this issue should naturally disappear.
A second factor, often cited, is the legitimate concern over violating Regulation FD (Fair Disclosure). One way to minimize this concern is to have members of management, who are more intimately familiar with the company’s disclosures, address questions regarding strategy and financial performance, while having directors concentrate on governance, compensation and policy issues. Another route to minimizing Reg FD risk is to have the board chair and/or lead independent director attend roadshows so they are available if investors want to talk with them, rather than scheduling one-on-one meetings. Regardless of the approach taken, boards should determine which directors are best equipped to meet with shareholders, and anyone doing so should receive training on Reg FD, familiarize themselves with the company’s investor presentations and press releases, and prepare thoroughly for the meetings.
A third factor may be the worry that if a shareholder’s viewpoints are not acted upon, the shareholder will feel ignored and relations will deteriorate. Directors and shareholders should understand that in any ongoing relationship, there will be differences of opinion from time to time, and both sides should be able to trust that the other party will act in good faith. Boards and investors need to approach engagement as dialogue rather than a list of mandates, and be willing to listen to each other’s perspective.
If ongoing and constructive dialogue takes place, the board may hear a significant number of investors expressing concerns about a certain issue or preference for a particular course of action. In that case, the board needs to seriously examine the investors’ concerns and re-evaluate its own actions.
On the flip side, if investors take the viewpoint that a board should always respond to their desires, directors are likely to be reluctant to participate in direct communications with them. Shareholders need to recognize that there may be compelling reasons for a board to not act upon their input. For example, a company may choose not to honor a request for increased cash distributions if a significant acquisition is on the horizon. Or, it may be that a particular shareholder’s viewpoint is not widely held among the investor base.
We are entering a new era of transparency and dialogue between companies and their shareholders. Boards need to embrace their role in shareholder engagement. Developing an investor engagement program, with guidelines, policies and procedures, should help assuage board concerns and encourage directors to proactively participate in the process.
To read part one in this three-part series on board engagement, click here.