Trust and pragmatism in meetings will
be rewarded in the long term.
In many countries, corporate boards and institutional shareholders are unhappy about the way they communicate with each other. In the United Kingdom, for example, companies complain that investors tend to tick boxes and that it is an uphill struggle to convince them to accept any deviation from the Combined Code, the country’s corporate governance framework. For their part, investors retort that they are too often denied an open and candid dialogue with the senior people at companies and, lacking the requisite trust, they have no option but to insist on strict adherence to form. Shareholders have recently expressed their wider frustrations by voting in unusually large numbers against the remuneration report at a number of recent annual general meetings in Australia, the Netherlands and the UK, and by demanding annual elections of the Chairman and board committee chairs.
To some extent the economic and financial crisis has made things worse but the discontent over poor communication has been simmering for years. If it persists, it could threaten the continuing viability of self-regulation on corporate governance in those regions where engagement between boards and shareholders is integral to the effective functioning of the system.
Directors who respond with openness and understanding can realize substantial benefits, including greater flexibility in structuring their boards, less angst about remuneration, and greater acceptance of other governance-related arrangements (including deviation from established best practices). Better communication will also underpin investor support in turbulent times, not least when activist shareholders agitate for change.
To gain these advantages boards should venture beyond conveying factual information and projecting a positive image of the company, and strive to build a long-term, trust-based relationship with their most significant investors. In doing so they need to conduct meetings in a spirit of candor, providing time for concerns to be addressed and not being afraid to admit to mistakes and differences of opinion.
Building long-term trust
Boards should view – and project – themselves as shareholder stewards. According to a major UK asset manager, “We engage with boards as much to get a sense of whether the board will promote and further our interests as we do to gain information on companies.”
Direct interaction between boards and shareholders is commonplace in the UK, where various board members – in particular, the chairman, senior independent director, and remuneration committee chair – routinely meet with key shareholders. But in other markets many boards continue to delegate shareholder engagement activities to the investor relations (IR) function. IR personnel will often not be able to provide the same level of comfort and assurance on governance-related matters as senior board leaders. At one continental European industrial company, the IR officer insisted that a major institutional shareholder meet him first, even though the investor was seeking personal assurances from the CEO that remedial measures undertaken in response to the findings of an internal investigation were progressing well. This lack of access to the CEO contributed to the decision by the institutional shareholder not to support the discharge of the board at
Similarly, lack of previous contact with the key individuals of a continental European chemical firm – coupled with the use of the IR function as an intermediary – contributed to the refusal of some shareholders to give the company the benefit of the doubt over a proposal to bundle the election of board members (rather than electing them individually).
1 A practice mainly in continental Europe whereby shareholders “sign off” on the activities of the board for the year in question.