It seems a radical idea: directors of public companies having direct, regular discussions with investors. That such a proposal even came up at the 2000 national conference of the American Society of Corporate Secretaries (ASCS), an otherwise sober gathering of corporate secretaries – if there was any rabble rousing, event organizers kept it well hidden from journalists – was surprising. But there this idea was, bouncing around the fringes of a few expert panel discussions.
‘We try to contact the independent directors of all the boards of companies we invest in,’ said Andrew Shapiro, president of Lawndale Capital Management in San Francisco, during a panel discussion on the connection between governance and bottom-line performance. ‘There should be regular interaction between investors and boards, and there should be dialogue, rather than monologue.’
Shapiro’s comments, at first blush, might seem, well… radical. But corporate governance, at least in the US, has become a hot topic for investors and the media alike, with a number of high-profile battles over poison pills, executive compensation, and other governance issues popping up recently. Warren, New Jersey-based Chubb Corp has faced a protracted battle with dissident investors over its poison pill (shareholders gathered enough votes to actually amend the bylaws, though the company has challenged that move in court). And late last year, Computer Associates International agreed to settle a well-publicized shareholder lawsuit stemming from large stock grants issued to key executives.
None of this suggests investors and analysts are clamoring for a free and open information flow between themselves and directors. As one sell-side analyst notes, the idea of getting in touch with independent directors is a non-issue: – ‘We don’t.’ Interest in governance is on the rise, however, and a growing number of investors are looking for an opportunity to hear from the board or have the board hear from them.
Ralph Whitworth, president of San Diego, California-based Relational Investors, which takes large stakes in a small number of undervalued companies, is actively involved with governance issues within many of the companies in his portfolio. Two such stocks are Waste Management and Mattel, companies that have come under spectacular fire for their boards’ oversight of management. ‘We are not corporate governance investors. But invariably, poor governance has played a role in the stocks we own becoming undervalued, and that means we’re going to be involved with governance issues,’ he says.
Dangerous ground
As directors are overseers of a company’s management, it makes sense that investors would seek to reach them and make sure active oversight is actually taking place (this is certainly more true of companies that are underperforming).
Likewise, it is equally plausible that directors would want to reach out to investors in order to communicate board actions, solicit views, and avoid a gap in understanding that might lead to an ugly proxy battle.
But to many governance experts, board members (especially corporate secretaries and general counsel), and even investors, too cozy a relationship between directors and investors has the potential to do more harm than good. One of the most troublesome aspects of this type of communication is selective disclosure. ‘From a disclosure standpoint, there are certainly potential problems. On that basis alone, direct contact scares me,’ comments Broc Romanek, a former SEC regulator and now director of internet strategic planning for RR Donnelley Financial.
To Peggy Foran, vice president of corporate governance at Pfizer and a panel member at the ASCS conference, there are other factors that are equally problematic, not least the roles – at least as currently defined – of directors and management. ‘In the normal course of business, you wouldn’t want direct communication occurring between directors and investors, because directors are overseers, not day-to-day managers. You also have more than one director, and you really want one spokesperson for the company talking to investors. That’s not traditionally the function of a director. In most cases, the job of communicating with investors falls to senior management and the investor relations group,’ she explains.
John Olson, an attorney with Gibson Dunn & Crutcher in Washington DC, agrees that having individual directors speaking with investors can be extremely risky for companies. ‘I’ve seen situations where investors thought a director was speaking for the entire board, and that can be very dangerous. But there are a lot of other problems with having direct communications between individual board members and investors, like creating an antagonistic relationship between management and the board.’
New demands
Despite these fears, there is general agreement that times have changed – boards and investors now need to have some form of communications flow beyond what takes place at annual meetings. This is especially true during moments of crisis. ‘When things go wrong and there are problems, everything changes, and directors are a big part of the communications process,’ notes Olson.
‘For many companies, directors never talk to shareholders; that’s fine when things are going smoothly but may not be ideal when there’s a crisis. You need a strategy for having directors talk to investors in extreme cases,’ says Carolyn Brancato, director of the Conference Board’s Global Corporate Governance Research Center in New York. She points to the successful involvement of Chrysler directors during 1995-6 when the company was fending off billionaire raider Kirk Kerkorian. ‘Chrysler’s directors ended up talking to and convincing shareholders that the company’s plan for creating value was better than Kerkorian’s.’
But beyond the hostile takeover, there is a growing consensus that directors can play a more active role in communicating with investors in the normal course of business. ‘Some companies are prepping directors for the possibility they might be called upon to talk to investors, and it can be worth having a few designated directors on call for such instances. We think that’s something companies might want to consider through their governance committee structure. It’s like fire insurance: you hope you don’t have to use it, but you want to have it,’ says Brancato.
Doling out information
The wide variety of ways in which companies have structured their investor relations programs only makes dealing with external communications, including board-to-investor communications, more complicated. ‘Within a large company, you might have corporate communications, investor relations, and shareholder relations. In a small company, you might only have one person who deals with all communications. And the reporting structure within companies can vary,’ says Ann Mulé, general attorney and corporate secretary at Sunoco. ‘But regardless of the structure, you need a policy to ensure a coordinated communications effort.’
Foran says Pfizer, which created its own corporate governance department, works hard to keep investors apprised of the company’s governance policies. And by working closely with the investor relations team and talking to institutional investors, she says investors seem less inclined to seek direct contact with directors. ‘I think the fact that we have a corporate governance department reflects that our senior managers recognize the importance of corporate governance, and investors respond well to that.’
Pfizer also issues its governance guidelines in the company’s proxy statement. But while this commitment is unusual, Foran believes more and more companies are recognizing the importance of communicating issues of corporate governance to investors. ‘I think a lot of the better companies recognize you have to set up a structure for governance.
I think more and more companies have guidelines that they will disclose.’
Taking the pulse of investors
In an upcoming report on ‘the role of the board in strategic planning’ for the National Association of Corporate Directors, John Olson says he plans to propose an even greater expansion of the relationship between directors and investors. ‘A board can’t credibly react to management’s strategic planning if they don’t know what’s happening in the industry and amongst their peers. They can’t only hear management’s views.’
Olson argues that directors need a far greater level of discourse with investors. ‘They should receive and review copies of analyst reports and listen in on analyst conference calls for quarterly results.’ As for direct dialogue with investors, he says the effort must be coordinated, so investors get their message from a unified voice. ‘Board members should always be good listeners but should rarely, as individuals, be the vehicle by which the corporation communicates back to investors.’
‘I agree shareholders should be able to meet with board members, and I think directors should listen in on conference calls,’ agrees Whitworth, who sits on the board of Apria Healthcare. But he cautions that when it comes to direct dialogue, there needs to be a structure for a coordinated process of communication.
Gary Cook, former CEO and chairman of Witco (now Crompton Corp following a 1999 merger with Crompton & Knowles), says he found it especially helpful to include investors in some board matters, especially when it came to nominating new directors. ‘A number of institutional investors were worried about the composition of our board because most of the directors had been there for some time. In my 20 years of experience, both at Witco and with other companies, I rarely saw investors focus on a specific nominee, but they will look at sitting members or the overall composition of the board and voice opinion. The fact is, someone needs to listen to them.’
One director who has taken it upon himself to raise the level of communication with investors – availing himself of conference calls, analyst reports, and even phone calls – is Charles Elson, a professor of law at Stetson University, head of the new Delaware Center for Corporate Governance, and a director of Sunbeam and Nuevo Energy. ‘Part of being a good director is being a good listener. So talking to investors is important. I listen to quarterly conference calls and I believe directors should return calls from investors – simply to listen.’ Elson also talks to reporters, adding that he looks for outside, independent information from all sources.
As for Shapiro, he remains committed to promoting direct dialogue with board members. ‘Directors should be seeking any and all input of information to make the best decisions on behalf of the corporation,’ he comments. ‘They should be willing and wanting to listen to any shareholder any time about anything that is meaningful. No one is asking directors to provide material inside information. But dialogue can take place to elicit more value added and qualitative benefit.’
The dialogue, he believes, benefits both sides. ‘In every case where we’ve been able to have a dialogue with a board, we’ve either seen it their way or they’ve seen it ours.’
