When should directors speak to investors?

Improving shareholder engagement has become a major concern for firms large and small, especially since investors have become more aggressive about challenging management’s corporate strategy and governance policies in the wake of the 2008 financial crisis. In fact, more shareholders seem to be asking to communicate directly with board members these days – but is it in the best interest of most companies to allow this type of engagement? And if so, how can companies provide access to board members while limiting risks?

There is little doubt overall shareholder engagement is on an upswing, but when it comes to allowing shareholders to speak directly with corporate directors, there rules companies should follow in order to avoid running into trouble. Any time a board member speaks to a shareholder there are issues of confidentiality and the potential violation of Regulation Fair Disclosure (Reg FD) that companies must guard against.

‘A few years ago, companies were less inclined to allow their directors to speak directly with shareholders,’ says Chris Hayden, a senior managing director in Georgeson’s proxy practice. But he now believes allowing shareholders to speak to directors ‘will be increasingly important in future years.’

An open question

Opinions vary on when it is appropriate for directors to speak to shareholders, but most experts agree that it should be done on a case-by-case basis. ‘I think a designated board member should engage directly with shareholders all year round,’ says Julian Cassells, president of Alpha Advisory Associates. ‘It may be somewhat risky if board members wait until thhere is an issue before they engage with shareholders. Given that global shareholder activism is increasing, it is advisable that the board develops and maintains a good and transparent relationship with all its shareholders – that way, there will be no surprises.’

While there are benefits to engagement between investors and directors, limits must be set. ‘Obviously directors can’t meet with every shareholder – that wouldn’t make sense,’ says Peter Gleason, managing director and CFO of the National Association of Corporate Directors.

‘It depends on the circumstances, which director and whether he or she is properly prepped to do it,’ says AST senior vice president Rachel Posner.

Larry Dennedy, chief administrative officer and executive vice president for MacKenzie Partners, notes that companies should be careful not to make it appear that board members are available to meet with investors on a regular basis because ‘your board members’ time is very valuable and they have day jobs. And once you open that door for an institutional investor, it could be hard to close it.’

Underscoring the need for good judgment when making this decision, Joele Frank president Matthew Sherman explains: ‘Ultimately, the management team is in charge of the day-to-day operations of the company, and providing investors with direct and unfettered access to the board may undermine the authority and credibility of that team. Having said that, however, having a board that is willing to engage and has a track record of open and transparent communications with the Street can bolster a company’s reputation for good corporate governance.’

Directors can add credibility

Despite the potential risks, there are scenarios in which allowing board members to speak to investors can be tremendously useful. Hayden says one such situation where it would be appropriate for directors to talk with major shareholders is ‘in a go-private or merger transaction. You might have the head of a special committee speak to certain large or key constituents in addition to direct investors.’

He also believes that if investors have questions about CEO succession, an independent board member could take the lead in explaining the company’s plans. In situations where the company is being criticized over its capital allocation strategy, Hayden says ‘a member of the finance committee might be helpful in explaining the board’s decision-making process.’

Keith Gottfried, partner and head of the shareholder activism defense practice at Alston & Bird, says directors can be useful during proxy season if a company plans to do a road trip or a set of conference calls to communicate with institutional investors. ‘It’s probably very helpful for one or two members of the compensation committee and another independent member of the board to be available to work with the director of investor relations and be able to explain the rationale behind the compensation plan – without the CEO and CFO on that call,’ he explains.

‘Another obvious example is if there has been an audit committee investigation, or if you have an audit committee review. If something has received a high level of attention in the press and the audit committee has been intimately involved and shareholders still have questions (subject to Reg FD), it might give investors a sense of comfort to have an audit committee member there to relay information that is already in the public domain. Hearing information, even if it is in a public filing, from a person who actually conducted the investigation may add some credibility to it.’

If a company is having a very public battle over a governance issue, this might also be a situation where directors could benefit from speaking to shareholders. ‘If investors have appropriate concerns, that would be the time to put forward one or two members of the governance committee, even if they are just regurgitating publicly disclosed information, to explain what the governance committee is doing to address these governance situations,’ Gottfried says.

Using the board

As a more general rule, when it comes to directors speaking with shareholders, Dennedy says, ‘if you have an institutional investor that is fully articulating a point, you can see its point of view and you are comfortable that your company’s board is addressing that issue, then the board can speak for itself, because the CEO can’t speak for the board.’

Of course, sometimes situations involving shareholders become contested and here, too, board members can be helpful. ‘In specific scenarios where there is a crisis – such as a proxy fight – management teams may need to rely on board members to help carry the torch from a communications perspective, as well as to show alignment between the management team and the board,’ Sherman observes.

Gottfried points out that in most cases a company with a lot of challenges will need the CEO and CFO to focus on running the business and not be distracted. He says that, if necessary, the board of directors should be prepared to be ‘the first line of contact, as well as the buffer to deal with activists and listen to their concerns’.

As the majority of proxy contests involve activists seeking to replace board members, having a board member out front communicating with investors can help diminish anything that could damage the relationship the chief executive and management team have with shareholders.

Establishing a policy

All boards should have a policy that designates specific members to speak to shareholders. In most cases companies should have the management team speak for the company and address shareholder concerns. Companies must determine the type of circumstances under which they will allow directors to speak to investors, however, and what type of information directors will be allowed to disclose.

‘The board ought to have a policy on who will be the people to speak, because you don’t want mixed messages going out,’ cautions Gleason. Which board members are designated can vary based on the specific problems that need to be addressed. It could be the lead director, the independent chair, the chair of the compensation committee or the chair of the audit committee, but companies should have designated spokespeople – and not just one designated spokesperson.

‘Then you need to have rules of engagement,’ Gleason continues. ‘You want management to address all questions first, then if it escalates to the point where a board member needs to be involved, you’ll have people to choose from to represent the board. You’ll also want to have counsel in the room.’

‘There should be a formal protocol on what directors should do if they get inquiries from investors,’ says Dennedy, who adds that no board member should communicate directly with a shareholder that randomly reaches out to them. Instead they should route all such requests through the corporate secretary and the investor relations officer, who can then determine what information is needed to answer the question and whether management or board members would be a better choice to address the matter.

‘One of the tactics activists use is to try to split the board,’ he cautions. ‘So if they write a letter or call a director and they have a dialogue, they are going to call another director, and another. They may call three different directors and get three different answers.’

Policy integration

Gottfried points out that the policy of when to use members of the board to speak to shareholders should be integrated into the overall communications strategy of the company. For example, anticipating problems with activists and using directors to reinforce certain public disclosures might help to get important information out faster, before it becomes a point of contention with investors.

‘There are ways to come up with a communication strategy that at least shows activists they are not so far apart from the company on their agenda,’ Gottfried explains. ‘It takes some style from the PR folks and some help from the legal folks, but that’s something people should do on the front end.’

While there are risks to having directors talk directly to shareholders, the fact that investors are much more vocal about changes they’d like to see in corporate governance and corporate strategy means companies must create effective policies that allow for more engagement between the two groups. ‘The worst thing you can do to an institutional investor is give it the feeling it is being ignored,’ says Dennedy. ‘Institutional investors have a lot of money invested in these companies; they are the owners, and they want to know they are being heard.’