A new era for boards and shareholders

With the new era of increased shareholder and board engagement birthed by the Dodd-Frank legislation, comes a number of challenges for companies with diverse shareholder bases that have differing and, at times, competing views. The intersection of board and shareholder relations really gets at the heart of the board’s strategic leadership competency and the responsibilities of good governance. With that in mind, I sat down with Derek Cole, Vice President, Investor Relations and Corporate Communication at ARCA biopharma, Inc. to gain his insights. Derek is also the current chair of the board of directors of the National Investor Relations Institute (NIRI) and appeared on the inaugural episode of NIRI’s new show IR Today – The Future of Investor Relations., developed in collaboration with Corporate Board Member.

What are the most impactful changes you have seen from the Dodd Frank legislation?

Dodd-Frank has clearly intensified focus on corporate governance issues.  In discussing the legislation’s impact, I think it is important to keep in mind the over-arching concept that corporate governance should evolve on a corporation by corporation basis, rather than by a mandated “one size fits all” regulatory approach.   Shareholders, boards and management should all collaborate to determine the appropriate issues and policies for their individual corporations.  One of the positive outcomes of the discussion around the Dodd-Frank legislation is greater transparency into corporate governance decision making.  This has led to an increasingly robust interaction between shareholders and management and the board of directors. Investors are increasingly taking the time to reflect on the difference between the roles of ownership and investor.  As a result investors, who want to be heard, present themselves from an ownership position over an investor position. The implications of this for the board are an increased positive, long-term partnership with investors.

This, in turn, drives the need for directors to commit the appropriate time to be well informed on their company’s public disclosures and corporate governance philosophies before speaking with investors. A proactive board asks for shareholder issues to be mapped and prioritized by management on an on-going basis so appropriate discussions can be held before an investor flash point is reached.  A collaborative approach among shareholders, boards and management teams allows for the development of the most appropriate long-term strategy and policies to drive increasing shareholder value.

Which brings me to a less positive side of some interactions.  Namely, increased pressure from some, not all, shareholder activists to pursue short term oriented strategies that may benefit only a small minority of shareholders.  Their corporate action suggestions, while potentially resulting in an unsustainable short-term increase in share price, often times fall short of understanding the long-term focus of corporate strategy.  Companies need to clearly articulate the benefits of their current strategy and truly believe that the strategy is a risk appropriate one that the board and management can successfully execute.

Cleary, a tension arises when there is a lack of alignment in a corporate strategy’s timeline and risk profile among the shareholder community and the company board and management. The director that interacts with the investment community needs to have an in-depth understanding of the company’s current strategy and the associated risks before speaking with the investment community. Management, in particular investor relations, can support and educate board members in identifying investor issues and concerns.  A clearly defined long-term strategy with detailed value creating milestones will enable boards and management to more effectively respond to a short-term oriented investor.  

What are a few high points that would benefit directors from the recent Strategic Organization Review conducted by National Investor Relations Institute (NIRI)? 

As NIRI undertook a strategic review of our organization and the investor relations profession, we knew that the environment companies operate in continues to evolve at an accelerating pace.  Changes in the global economy, capital markets, investment community, regulatory environment and the investor relations profession combine to have a significant impact on corporate strategies and operations.  A couple of points for Board members to keep in mind:

1. The sheer number and pace of these changes I mentioned can often lead companies (Board, management, IRO) and investors to focus on short-term, supposedly urgent issues at the expense of focus on the long-term strategy of the company that will deliver returns to shareholders and customers in the long run.  We all need to be cognizant of the tendency and help everyone focus on the most productive use of our limited time and resources.
2. Issuer companies’ desire to explain their companies and their long-term strategies and an ever growing thirst for this information among analysts, institutional investors and individual investors has led to much richer, robust interactions among these groups.
3. Capital is global – investment resources flow to where they can find the best returns appropriate to their charter.  For many companies, their international shareholder base may be their first exposure to the global economy.  
4. The global nature of the competition for investment capital is evident in that 50% of capital raised for corporate growth is outside of the US. That said, the experience and comfort level of investors differs between emerging and developed economies. A recent McKinsey Global Institute report, “The emerging equity gap: Growth and stability in the new investor landscape” (http://www.mckinsey.com/Insights/MGI/Research/Financial_Markets/Emerging_equity_gap ) describes a potential $12 trillion “equity gap” over the next decade between the amount of money that investors will wish to hold in equities and the amount that companies will need to fund growth.  Clearly, the future availability of growth capital is a long-term issue for Board members to keep an eye on.