Directors are elected by shareholders to represent their interests. In today’s world, shareholders want an opportunity to communicate their concerns directly with the board, as well as with management. But what level of communications is reasonable and appropriate?
At a recent Colorado Chapter meeting of the National Association of Corporate Directors (NACD), a panel of experts focused on the evolution of shareholder communications, and explored the issues relating to disclosure of information that may not technically require an 8-K filing with the SEC. The panel acknowledged that we are moving rapidly through the age of governance, compliance, and board management and into a new era of shareholder focus with the emphasis on strategy, transparency and activism. Our guardrail remains Reg FD, or the Full Disclosure regulation, and counting on the CEO, CFO and the Investor Relations Officer (IRO) to manage discussions with shareholders about strategy and operational performance.
While the board has traditionally been the focal point for communications around governance issues, shareholders are now successfully pushing efforts to engage the board in strategy and capital allocation issues. This development heralds a new level of shareholder activism by both institutional investors and activist investors.
Communicating in this “post-governance” age requires a deep knowledge of who is holding your stock, and always working on the assumption that your company will be a target for activists of all kinds. Activists target the soft underbelly that often resides in vulnerable governance weaknesses of a corporation or the capital allocation opportunities that may exist with companies holding excess cash on their balance sheets. They are intent on forcing change to the boards' direction or obtaining their own seats on the board to push for these changes.
Though activists should not be the primary reason for assuring clear communications with shareholders, the fact that activists are more active than ever – and that there are now over $200 billion in investor funds focused solely on activist investor opportunities – ought to be reason enough to create a focused communications plan. The methods, timing, contents and follow up with shareholders become critical elements of an effective communications plan. The plan should be multi-tiered with roles for the CEO, CFO, IRO and the board of directors. Everyone on the team should understand the company story, strategy and governance issues. The primary communication roles for each topic should be specifically assigned amongst the management team and the board of directors.
First, reviewing and revising your policy for communicating with directors is critical. Setting the foundation for handling documents between the corporate secretary and between directors establishes the pattern for what is discussed with shareholders and other constituents. These documents can include letters to the board from shareholders, shareholder proposals for the proxy, whistleblower complaints, etc. Next, disclose the existence of a communications policy and list those documents within this purview.
Internally, identify who will respond to constituencies on what topics and assure that documents used to communicate are outlined within the policy. Best practices dictate that communications with shareholders directly or through intermediaries are best handled with the CEO accompanied by someone else, usually general counsel, investor relations executives, and the CFO.
When identifying a director to communicate board strategy, prepare the board member by providing a level of confidence in that person’s understanding of the content that is aligned with company strategy. When talking with institutional investors, choose a date in the fall and not in the spring when proxy management is heaviest.
Key Points in Rolling Out Communications Strategy
- Communicating your capital allocation strategy should be a prominent board responsibility. Capital allocation has been and will remain a key determiner when it comes to investors’ and activists’ views of your company’s market viability. When communicating high-level strategy, go beyond what is typically shared with analysts on earnings calls. This can be done effectively in an annual analyst day presentation with both the management team and board of directors in attendance. Also, the company's annual report with letters from the chairman and the CEO can be useful tools for publicly disclosing the company's strategies.
- Know who is buying your stock by starting with shareholder research conducted by a third party. It is important to provide high-level strategy points while keeping in mind that the communications are being received by all constituencies including institutional and retail investors, activists, analysts, competitors and customers.
- Monitoring social media is a part of the communications plan and provides insight not only into real-time perceptions of the company, but pending changes in shareholder thinking. Getting out ahead of the conversations on social media is a must in order to both learn about shifts in shareholder sentiments and build defenses for potential activist approaches.
- Messages that focus on performance, provide information in an index or graphical format and use consistent descriptions of year-over-year performance that compare the company to peers and the overall stock market are of the highest priority. Wording from any outside review of your company by an investment banker or others provides credibility and shows the investment community that you are driven by third-party views supported with the art of efficient management.
Communicating the value of your company, the efficiencies of decisions and a coherent and sensible strategy are key duties of the director. Understanding the makeup of shareholders, and the differing views of a broader constituency, have also grown in importance as directors’ responsibilities.
Moving through the age of governance to the age of strategy, transparency and activism requires the most critical duty of a director – the courage to step out in front and manage communications on a stage with more moving parts than there were even just a few years ago.