Governance structures and practices should be designed to encourage communication with shareholders.
Shareholders have a legitimate interest in the governance of their companies. The fundamental role of shareholders in corporate governance is to elect directors capable of directing management in the best interests of the company and its shareholders. Receptivity to shareholder com- munications on topics relevant to board quality and accountability may prove beneficial in helping to improve mutual understanding while avoiding needless confrontation.
The board should carefully consider critical non-binding proxy proposals that attract significant support from shareholders. The board should take special care to ensure that it fully understands the issue and should communicate both with the proponent and the shareholders at large regarding the board’s thinking on the matter. Such communication can be had through the proxy statement, annual report, annual meeting, and other meetings and correspondence with the proponent and other shareholders (subject to compliance with Reg FD).
Boards should also consider reaching out and developing stronger relationships with investors through candid and open dialogue. In particular, boards should consider ways to engage large long-term shareholders in dialogue about corporate governance issues and long-term strategy issues, recognizing that the board’s fiduciary duties with respect to these issues mandate that the board exercise its own judgment.
Board communications with shareholders on these issues should involve one or more independent members of the board—usually the board chair, the lead director, or the appropriate committee chairs. In most instances, the CEO or other members of management should also partici- pate. The board should establish processes for communications to ensure that any communications with shareholders are authorized by the board.
Executive compensation is an issue of particular concern for many shareholders. The board and the compensation committee should consider ways for shareholders to communicate their views and concerns regarding executive compensation, and should take these views and concerns into account, again recognizing that ultimately the board as fiduciary must make compensation decisions. Some boards may wish to consider seeking advisory shareholder votes on executive compensation, while some boards may explore other means of obtaining shareholder view- points.
The board should also consider ways to enhance the communication opportunity provided by the annual meeting, taking into account shareholders’ expense and convenience when selecting the time, location, and mode of meetings (i.e. in-person meetings, meetings via electronic communication, or both). All directors should attend the annual meeting, and shareholders should have the opportunity to ask questions, subject to appropriate procedural rules (for example, those designed to ensure that a variety of shareholders can be heard from in the limited time available).
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X.A. Board Interaction/Communication with Shareholders, Press, Customers, etc.51
ALI Principles/Recommendations BRT Principles NACD Report Conference Board Recommendations OECD Principles/Millstein Report
Not covered directly, but see § 5.01 (Directors, senior
executives, and controlling shareholders, when inter- ested in a matter affecting the corporation, are under a duty of fair dealing, which . . . includes the obliga- tion to make appropriate disclosure . . . .).
[I]t is the responsibility of the corporation to engage with long-term shareholders in a meaningful way on issues and concerns that are of widespread interest to long-term shareholders, with appropriate involvement from the board of directors and management. (p. 3)
The board should have an understanding of who the cor- poration’s shareholders are and what their policies are on major [relevant] issues. (p. 23)
Corporations should productively engage with their long- term shareholders in a manner consistent with the respec- tive roles of the board, management and shareholders. Corporations should be responsive to issues and concerns that are of widespread interest to their long-term share- holders … [and] take steps to educate shareholders and other stakeholders about the board’s role and its oversight responsibilities. Corporations should encourage share- holders to make voting decisions based on consideration of what is in the best interests of the individual corpora- tion and its shareholders. Meaningful involvement of shareholders requires that shareholders make company- specific judgments and consider the interests of the spe- cific corporation. … [A] corporation should consider ad- ditional outreach efforts as appropriate to explain the ba- ses for the corporation’s recommendations on the matters it is asking shareholders to vote on . . . [such as] periodic meetings with the corporation’s large shareholders or other outreach to obtain feedback from long-term share- holders …. Corporations should carefully consider the views of shareholders, but keep in mind the duty of the board to act in what it believes to be the best interests of the corporation and all its shareholders. … Corporations should have effective procedures for long-term share- holders to communicate with [directors] and for directors to respond in a timely manner to [their] concerns. (pp. 30-31)
See also Business Roundtable, GUIDELINES FOR
SHAREHOLDER-DIRECTOR COMMUNICATIONS (May 2005).
Not covered.
See REPORT OF THE NACDBLUE RIBBON
COMMISSION ON BOARD-SHAREHOLDER
COMMUNICATIONS (2008).
Company executives charged with communicating with shareowners, such as the Corporate Govern- ance Officer, Corporate Secretary and Investor Re- lations Executives, should formulate and communi- cate to investors a strategy specifically designed to attract investors known to pursue long-term holding investment strategies (e.g., public and private pen- sion funds and mutual funds that emphasize index strategies, money managers with stated long-term investment horizons, etc.). In this way, the corpora- tion may be able to reduce the volatility in trading of its shares and build a stronger shareowner base. (Part 2, Principle IX, Best Practice 1)
While corporations cannot dictate how investors make their decisions, they can provide them with information that is focused more on long-term strategies, financial goals, and intrinsic values, and less on transitory short-term factors. (Part 2, Prin- ciple IX, Best Practice 4)
See Part 2, Principle IX, Best Practice 5 (Institu-
tional investors should establish compensation ar- rangements for portfolio managers that reward a long-term rather than short-term focus.).
See also Part 2, Introduction at 28 ([T]o the extent
institutional investors – holding more than half of all equity securities of U.S. companies – are traders rather than owners, they . . . squander their potential influence on corporate management and policy.).
The exercise of ownership rights by all shareholders, in- cluding institutional investors, should be facilitated. (Principle II.F)
Channels for disseminating information should provide for equal, timely and cost-efficient access to relevant in- formation by users. (Principle V.E)
The corporate governance framework should be com- plemented by an effective approach that addresses and promotes the provision of analysis or advice by analysts, brokers, rating agencies and others, that is relevant to decisions by investors, free from material conflicts of in- terest that might compromise the integrity of their analy- sis or advice. (Principle V.F)
See Principle II.G (Shareholders, including institutional
shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to pre- vent abuse.).
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See 2011 ABA Guidebook at 28 (“Although a public company director may receive inquiries from major shareholders, media, analysts, or friends to comment on sensitive issues, individual directors should avoid responding to such inquiries, particularly when confidential or mar- ket-sensitive information is involved. Instead, they should refer requests for information to the CEO or other designated spokesperson.”); id. at 110-111 (“Boards may . . . want to develop communication policies or protocols to promote dialogue with or facilitate receipt of input from shareholders. For example, shareholder groups may request an audience with the lead director, the independent directors, or an independent board committee to discuss various corporate governance issues and concerns. Boards need to consider appropriate policies to respond to such requests.”); 2013 NACD Survey at 38 (When asked if board representatives have met with institutional investors in the past 12 months, 52.6% of survey participants said yes. 90.8% of board members surveyed agree or strongly agree that the board has a satisfactory relationship with long-term investors.).
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