SHAREHOLDER ENGAGEMENT:A BALANCING ACTA 2017 CORPORATE BOARD MEMBER SURVEY REPORT

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Last May, Corporate Board Member surveyed more than 300 public company directors to take their pulse on the practice of shareholder engagement amid today’s boardroomreality. As proxy advisory firms continueto gain influential ground and push for new governance practices, board members shared their mixed reactions as to whether their oversightresponsibilities should mandate regularcommunication with shareholders outside of the annual meeting and quarterly earnings calls.

At a high level, what we found is that the question goes well beyond whetherengaging with shareholders is a duty oftoday’s public boards. It encompassesseveral other subsets of consideration,including the appropriate frequency ofthese “informal” talks with investors; theacceptable time investment by all whoneed to be present; the intricate task of articulating the core message anddefining the depth of information thatcan be exchanged—as determined bysenior management, counsel, and regulations; the delegation of roles and responsibilities to ensure the rightexpertise is at the table; and even rulesof authority, since many believe thevoice of the CEO should be the only oneauthorized to be heard publicly whenspeaking on behalf of the company.

Yet, if the CEO is the official representativeof the company, aren’t board membersrepresentatives of the shareholders? So, amid this duality, who is best placedto address shareholders’ concerns? And how can such a large group of people arrange to speak with one voice,without compromising regulatory requirements and ethical boundaries?

TO ENGAGE OR NOT TO ENGAGEAll public companies must engage with their owners at one time or another, whether it is to address specific concerns, report results, discuss strategy, or purely to maintaingood relations. What our survey

uncovered, however, is that while thenumber of companies that have initiated communications with their key stakeholdershas been increasing steadily over theyears, only a slim majority (55%) of the public directors surveyed reportedhaving had direct engagement with investors within the previous 12 months,outside of the regularly scheduled callsand meetings (Figure 1). In addition to such engagement distracting fromtheir oversight duty, many view shareholder-director communications a compliance risk—a finding that is notall that surprising, as our survey revealed41% of directors say they still need clarification on certain areas of Regulation FD (Figure 2).

Two-thirds (68%) of the CEOs we spokewith on the issue agree directors shouldn’tengage with shareholders without them,or at least without counsel, CFO, or IRrepresentation. “[Directors] shouldn't be authorized to individually engage indiscussion and make representations onbehalf of the company/ board,” explainedone CEO who believes the board shouldonly speak via resolutions and actions,but not in deliberation or discussion externally without the CEO or GC present.

For the vast majority of companies, directors report that investors have soughtout engagement with their CEO (85%),compared to 60% who say shareholdershave engaged directly with the boardchair or lead director (Figure 3).

In the meantime, however, the SEC hasrepeatedly encouraged board/investorcommunications, supporting the notionthat directors ought to seek new ways to foster engagement and participate intheir company’s shareholder engagementactivities as a foundation for good governance. Having a well-thought-outoutreach program adds credibility in the face of mounting pressure from institutional investors and proxy advisoryfirms and allows shareholders to experience firsthand the attention andimportance the board and leadership

SHAREHOLDER ENGAGEMENT

FIGURE 2Would you say you fully understand Regulation FDand when and how it appliesto shareholder engagement?

Yes 59%

No 41%

No41%

Don’tknow4%

FIGURE 1In the past 12 months, has your board had direct engagement with investors outside of regularly scheduled earnings calls and the annual meeting?

Yes55%

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team confer to their proposals, concerns,and inquiries. It can also minimize thepotentiality of activists suddenly emerging, since, as one director in our survey sagely noted, resolution ofdisagreement requires communication.

If shareholder engagement helps reducethe likelihood of activism, our findingsnevertheless reveal that most directorslack preparedness in that regard: While 62% believe it is helpful to undergo “think like an activist” trainingto identify vulnerabilities, 75% say theirboard has not done so (Figures 4 and 5).Research shows preparation in the face of activism, or of any investor disagreement for that matter, is as critical as it is time sensitive. Promptlydiscerning opportunities to improve performance in the short term and appease certain investors before doubtsarise and without sacrificing the longterm is crucial. Regularly engaging with major stakeholders on their mainconcerns may very well be the best first line of defense.

Notwithstanding, several of the respondents implied in their comments a certain weariness with having to dealwith an increasing number of what areoften regarded as illogical or utopianconsiderations, such as tenure, gender,and overboarding mandates. “The biggergovernance issue,” commented a director, “is this push by ISS and othersto turn board governance into a formulaic exercise. Interestingly, in all

the debates about board tenure, age,and composition, the word I rarely, ifever, see is competency.” Many other directors who responded to our surveyshared a similar opinion, indicating that a one-size-fits-all approach can behighly detrimental to some companies.

“We would very much prefer that shareholder engagement be about business strategy, shareholder value enhancement, and total shareholder return, instead of artificial guidepoststhat don’t apply to all companies thesame way,” opined one respondent.“Constantly fighting artificial limits is discriminatory in itself and a waste ofshareholders’ time and value. Shareholderswant better returns, not three highlypaid consultants to determine the number of directors per share, distractingmanagement and the board from working on business strategy in a highlycompetitive and fast-moving environment.[We spend] way too much time curatingthe types of trees and not enough timegrowing the forest. Is there anyone whobelieves governance and pay at Amazonor Tesla should be the same as at anelectric utility?”

As demands to optimize boards andtheir processes have been intensifyingon all fronts, one director noted that hisbiggest concerns involve the mountingexpectations of regulators, proxy advisory firms, and activists—and the liability that ensues. While some issuesraised by shareholders and proxy advisory firms are warranted and havebeen shown to improve board efficiencyand performance, directors say theyoften cloud more pressing agenda items,taking away from strategic discussions.

But it is particularly in light of this growing pressure that there has neverbeen a more critical moment for all parties to sit down, have an open dialogue, and clarify everyone’s role and viewpoints, to the long-term benefit of all shareholders.

FIGURE 3Which individuals in your company have investors engaged with directly?

85% CEO

60% Chair or lead director

34% Other designated director

25% Corporate secretary or GC

18% CFO

18% Other

FIGURE 4Do you think it is helpful for corporate boards to undergo "think like an activist" training?

Yes62%

Unsure21%No

17%

FIGURE 5Has your board ever undergone"think like an activist" training?

Yes25%

No75%

“Directors ought to seeknew ways to foster engagement and participate in their company’s shareholder engagement activities as a foundation for good governance.”

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