DealBook Column
Investors to Directors,
‘Can We Talk?’
By
ANDREW
ROSS SORKIN
July 21, 2014 8:45 pm
David P. Frick, a member of Nestlé’s
executive board, reportedly said that the company’s largest
shareholders declined an offer to meet with the chairman or did
not show up at the meetings. Credit
Michael Buholzer/Reuters |
What if
lawmakers never spoke to their constituents?
Oddly
enough, that’s exactly how corporate America operates. Shareholders vote for
directors, but the directors rarely, if ever, communicate with them.
Within the
clubby world of directors, communicating with shareholders, big or small, is
overtly frowned upon: “We endorse the principle that direct engagement
involving directors should not be a routine method of engagement for most
U.S. companies and for most investors,” according to the Conference Board
Governance Center Task Force on Corporate/Investor Engagement.
That’s why
it was so unusual for the chairmen of at least 1,000 large United States
public companies to receive a letter this month from a group of shareholders
representing more than $10 trillion in assets with a demand: Talk to us. The
letter, signed by representatives of some of the biggest investment groups,
including BlackRock, Vanguard and Calstrs, insisted that boards open up.
“Engagement
between public company directors and their company’s shareholders is an idea
whose time has come,” wrote the group, known as the Shareholder-Director
Exchange. “We believe that U.S. public companies, in consultation with
management, should consider formally adopting a policy providing for
shareholder-director engagement.”
What was
uncommon about the letter was that it came not from activist investors like
Carl C. Icahn or William A. Ackman, but from institutional investors that
until recently had traditionally always supported whatever a company’s board
recommended. Now, those investors want a dialogue.
The reason
boards have long shunned speaking with investors is multifaceted. Management
— the chief executive, chief financial officer and so on — usually have
meetings with the company’s biggest shareholders. Some directors avoid
meetings. worried about speaking with one voice. Most don’t consider it
their responsibility. Some are anxious about accidentally disclosing
sensitive information. A memo to directors on this topic from the law firm
Latham & Watkins was explicitly titled “Dangerous Talk?”
Some chief
executives are insecure and don’t want shareholders to get too close to
their boards for fear they will have undue influence. After all, most
directors rely directly on management and their presentations to understand
what’s going on inside the company and what shareholders think.
And then
there is this: “Many top executives seem to think that board members cannot
be trusted with such interactions,” according to Harvard Business Review.
“Yet if directors cannot be trusted to meet with and listen to shareholders,
how can they be expected to competently govern a corporation?”
The
Shareholder-Director Exchange — which was created by the law firm Cadwalader,
Wickersham & Taft and the corporate advisory firms Teneo and Tapestry
Networks — has drafted what it is calling the SDX Protocol, a series of
guidelines it hopes public companies will adopt and publish to determine
when shareholder and director engagement is appropriate.
The
guidelines suggest that companies decide under what circumstances a
shareholder’s request to meet with directors should be granted: to discuss
the board’s composition or management performance, for example. The point is
that companies should decide, in advance and transparently, how they plan to
communicate directly with shareholders long before a proxy fight were to
develop.
Of course,
there is a potential downside to all this transparency: If a board becomes
too enamored with a particular view from a set of shareholders, it could
lead to short-term thinking that undermines long-term performance.
A new study
by the Institute for Governance of Private and Public Organizations, looking
at a series of other studies about the value of activism, determined that
“the most generous conclusion one may reach from these empirical studies has
to be that ‘activist’ hedge funds create some short-term wealth for some
shareholders as a result of investors who believe hedge fund propaganda (and
some academic studies), jumping in the stock of targeted companies.”
There is
also the problem of unfair access. Large investors might have the
opportunity to meet with directors while small retail investors almost
certainly never will.
There is,
oddly enough, a counterintuitive reason that shareholders and directors
don’t speak. The shareholders despite saying they want a dialogue, actually
aren’t interested. According to Tapestry Networks, at a conference, a member
of Nestlé’s executive board, David Frick, “talked about a program to invite
its largest shareholders to meet with the chairman in various cities in the
U.S. and Europe. He said shareholders had either declined or simply didn’t
turn up to the meetings.”
Even so,
last year’s proxy season showed that only a quarter of the companies in the
Standard & Poor’s 500-stock index “publicly reported engagement efforts or
policies in their proxy statements,” according to the Shareholder-Director
Exchange.
In the age
of activism that is clearly not going away, it would seem that some form of
engagement from directors with shareholders — rather than directors simply
taking their cues from management — would go a long way toward helping
boards work on behalf of all shareholders rather just the most vocal.
A version of this article appears in print on 07/22/2014, on page B1 of the
NewYork edition with the headline: Investors Ask Boards, ‘Can We Talk?’
Andrew Ross
Sorkin is the editor at large of DealBook. Twitter:
@andrewrsorkin
A version of this article appears in
print on 07/22/2014, on page B1 of the NewYork edition with the headline:
Investors Ask Boards, ‘Can We Talk?’
Copyright 2014
The New York Times Company |
