It’s no secret that for years a corporation’s outside counsel typically advised their board of directors to lay low and to avoid communicating directly with investors. This advice—to neither be seen nor heard except through company spokespersons, counsel or from afar—was based on the premise that if a board member said the wrong thing, the company could potentially open the door to litigation. I was always amazed in the old days that a shareholder could go to an annual meeting and maybe, just maybe, get a chance to meet an outside board member. Corporate board “protectionism” ruled, and investors, while sometimes openly frustrated at annual meetings, didn’t muster much of a push to change the status quo.
Fast forward to today, and we find corporate boards in a much different place with respect to their communications with shareholders. Many companies are reaching out to meet with large investors and proxy advisors even when they have a good governance track record. Also new disclosures, both required and requested, have in some cases increased shareholder engagement with enhanced annual proxies. Outside counsel and governance advisors continually send boards regular updates on shareholder engagement strategies to ensure important votes are secured for Say on Pay or re-election of directors.
When most of us think about shareholder engagement, the most common expectation is a face-to-face meeting. Boards have gotten so good about requesting meetings that sometimes asset managers and proxy advisors respond with: “We appreciate the call and effort to meet with us, and it has been noted. In the future, don’t worry about calling us, we’ll call you if there is a problem worthy of us having to engage.” Companies that receive this message should feel good about this response, and they will get a positive check mark for reaching out and continuing the practice.
So if some boards can’t engage face-to-face, that leaves their annual proxy as the next-best form of engaging with shareholders. Now, I personally think there is limited value in current proxies; as a shareholder myself, I don’t trust much of what’s in a proxy beyond the factual data. Enron, for example, had a robust proxy and operated in a fashion quite contrary to what their proxy stated. Too many mandated sections of the proxy are lawyer-written passages that are almost word for word the same from company to company. But I digress, and need to get to my point…
My point is boards can use their proxy effectively. Important people who vote shares read the proxy, and boards should make a best effort to use the proxy as a valuable communication tool, and not just required disclosures. Here are three issues that I think boards should be communicating to their shareholders both in the annual proxy and on their corporate website. Remember these aren’t required, but they are on TK’s best practice list of what great boards can communicate (and should communicate) to shareholders:
1. ESG Efforts — I’m listing ESG first due to the marked increase in investor interest. Key players (i.e., investors, activists, regulators) are still figuring out exactly which metrics are appropriate for disclosing ESG and which ones should be recommended/required. Organizations like Sustainability Accounting Standards Board (SASB) or the Task Force of Climate-Related Financial Disclosures have put out helpful metrics, but the bar is currently at the lowest level looking at what’s ahead. At this point, boards that demonstrate efforts to get their arms around ESG and improve on current disclosure will be noticed and appreciated. High-performing boards are getting another leg up and taking the steps to implement voluntary frameworks or other recommended standards in their reporting. This low bar won’t last forever, so boards should use this year to get into the flow.
Boards should make a best effort to use the proxy as a valuable communication tool, and not just required disclosures.
2. Board Evaluation Process — Institutional investors continue to stress that their most important mission of late is ensuring that a company has the right people around the boardroom table. Needless to say, that when PwC’s 2018 Annual Corporate Directors Survey reflects the same statistic year-over-year—that some 45% of current directors feel that at least one director on their board should be replaced—it motivates shareholders to look a little deeper into how boards evaluate and refresh themselves to stay current and flexible for today’s transformational challenges. All the above has put a board’s evaluation process on the engagement checklist. Many companies are communicating their assessment process and resulting actions even though it is not required. If your board is not doing this, then consider yourself behind the times and open for inquiry. Get ahead of any outside request for this information.
3. CEO and/or Management Succession — Ensuring a company has the right CEO and management team is among the board’s most important and foundational tasks. Investors know that CEO and management team selection and evaluation is critical, and they will want assurance that your board can handle this critical task. If you haven’t had to hire, terminate or replace a CEO, they want to know your process and preparation. Companies that aren’t prepared to replace their CEO when an unplanned event occurs pose a great risk to shareholder value. Boards need to share their CEO succession process, even in its most basic form. At the least, boards must let the investing public know that they have a process and that the board understands how important this task is when it comes to mitigating risk.
Again, none of these above disclosure recommendations are required; however, I encourage you to look up the proxies of the companies that have the best long-term financial and stock performance. I think you’ll find that they always use their proxies effectively and work hard to communicate with their “owners” on these issues, which are the real foundation of a successful company. I already know what you’ll find!
TK Kerstetter is the CEO of Boardroom Resources/Diligent and is a second generation pioneer of governance thought leadership and board education. He can be reached at firstname.lastname@example.org.