In response to the plethora of corporate failures in the past two years, new legislation adopted by Congress and subsequent SEC regulations have placed greater responsibility on the board of directors. And in fulfilling these new responsibilities, boards are expected to oversee corporate ethics and governance, as well as compliance.

But in many cases, boards lack critical information and analytical resources that can assist them not only in meeting these new statutory edicts but in the greater challenge of restoring investor confidence in their organizations.

If a board's ultimate boss is the shareholder, it's only logical that boards should know what their shareholders expect. Too often that is not the case, even with the most respected, and well-governed companies.

The appropriate person for the board to turn to for this key information is the company's investor relations officer — the one who deals with analysts and investors day-to-day. This means that the board's relationship with the IRO must become closer and more critical.

At the first meeting of the board's new investor relations committee and the company's IRO, here are a few questions this committee should be asking the IRO in order to get better acquainted.

How do our shareholders define good corporate governance?

Sometimes the most obvious questions are the ones that don't get asked. Today, boards are far more sensitive to the reputational and economic harms that result from negative public and investor opinions of a company's management or business strategies.

Unfortunately for the vast majority of companies today, it's guilt by association. Clearly, the best way for a board to meet or manage its shareholders' expectations regarding good corporate governance is to find out how they are defining it.

What do our shareholders think about our corporate governance structure? How do they rank it compared to our competitors?

As a key to competing for investors and enhancing shareholder value, good corporate governance standings vis-à-vis competitors is on top of everyone's list. But, how should the competitive set be defined? Boards need to consider a broad cross-section of comparables, paying particular attention to other companies that could meet the same investment profile. This is the way many investment managers screen stocks and will probably yield some creative suggestions on how to make improvements that matter to investors.

How confident are our shareholders in the levels of integrity and competency of the board and senior management?

Certainly, meaningful due diligence on these points can return unpleasant findings on a personal level. But, here is where candid, confidential conversations between the IRO and independent members of the board can produce actionable results that improve the company's overall standing with investors.

A board-level investor relations subcommittee composed of independent directors may be a good forum in which to address issues that arise from this due diligence, as well as to interpret ongoing information on investor sentiment.

How do we ensure that a well respected corporate governance program is reflected in our share price?

Unlike a single fiscal quarter that yields a transient jump in stock price, a well-respected, established corporate governance program should have positive staying power when it comes to shareholder value. In fact, this is where share price really is a direct measure of board performance. As such, "getting the word out" about the health of your company's corporate governance program can generate positive media attention and increased trading in your company's stock. What interdisciplinary communications strategies has your IRO developed to address this need?

How does the company define "important to shareholders," and who was involved in developing this definition?

2003 is shaping up to be a record year for shareholder activism. While shareholder proposal submissions on corporate governance issues lead the pack (as reported in the Feb. 20 issue of Compliance Week), submissions on social and environmental issues have also increased.

Are there any surprises looming out there that could garner negative press and contribute to a negative public perception of the company and its board? It's definitely worth checking — in your current shareholder community as well as target investors with attributes that are consistent with those of your existing shareholders.

How do we engage our major shareholders on important topics? Are we reactive or proactive?

Understanding how the company's IRO and senior management communicate with key institutional investors is an important gauge for directors to determine whether management's portrayal of a particular investor relationship is accurate. Today, however, a proactive IR approach is especially tricky due to Regulation Fair Disclosure.

Some companies have opted to take a highly conservative approach by engaging in dialogues with investors only in open public forums while others still speak with large shareholders on an individual basis, mindful of the limitations imposed by Reg FD.

Either way, it's important to understand the frequency of the communication, whether investors have access to senior management outside the quarterly conference calls, who speaks to whom, and what types of dialogue are most effective. Typically, companies that are in the best position to provide the board with an accurate assessment of investor sentiment proactively seek to uncover this information through the use of an independent, third-party intermediary.

What mechanisms are in place to gauge investment community opinion on non-financial issues or concerns?

Although measurement parameters for companies' financial performance are in for a change, there will still be quantitative measures available to gauge financial performance. Everything else is qualitative. Differentiating between those opinions that warrant further action and those that don't (and why) takes both informed judgment and common sense.

Although hindsight is 20/20, a well-defined strategy in this area will help maximize a positive perception of your company in the marketplace. In addition, an annual investor perception audit with quarterly spot checks can help you identify trends in investor sentiment and keep tabs on the types of issues that gain traction.

What are the company's internal communications policies and procedures regarding matters that are important to shareholders? How are they working? Are you "kept in the loop"?

While it's not the board's role to micromanage the day-to-day interactions between senior operations staff and the IRO, the board should understand the policies and procedures in place to safeguard against the company unknowingly taking or seeking to take substantive steps that are contrary to stated shareholder opinions. This is particularly important when shareholder approval is required to effect these steps, such as implementing a new stock option plan.

What are our external communications policies and procedures regarding matters that are important to shareholders?

Equally as important for the board is an understanding of — and comfort level with — how information is checked and scrubbed before it's communicated to shareholders. This is particularly germane to information that would qualify as "material to an investment decision" under securities laws, as the board's exposure to liability is increased here.

Who do you go to for guidance on sensitive communications issues? Are they adequately available and responsive?

All shareholder communications, from routine to special situation, ultimately reflect on corporate management and the board of directors, and the IRO serves as the gatekeeper of these communications. As such, the board is entitled to a high degree of comfort regarding the counsel provided to the IRO. This is particularly important today, when public companies and their counsel are still trying to sort out the far-reaching implications of the Sarbanes-Oxley Act of 2002 and new SEC rules.

What do our shareholders think of the new corporate governance ratings? How are they using them to make investment and proxy decisions?

On an institutional level, it's worth noting that not all shareholders agree with the parameters employed by the numerous rating services that have surfaced over the past two years. Moreover, these services are not using identical criteria so it's possible that the same corporate governance structure within a company could receive dramatically different ratings from different services.

Understanding how these ratings services work and what your shareholders think of them will help you further clarify how your shareholders define good corporate governance.

How can we help you do your job better?

 

This column solely reflects the views of its author, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.

 

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