Board-Investor Dialogue: There's an App for That

Everyone these days is expounding on the benefits that flow from investor-corporate dialogue, including us. Even law firm Wachtell Lipton, famous for its opposition to shareowner intrusion in board affairs, recently urged directors to speak to investors as a tactic to prevent defeat during “say-on-pay” votes.

Dialogue has certainly proven a cure in that area; nearly all companies that saw say-on-pay votes fail in 2011 talked with investors, took their concerns into account, amended their compensation plans, and earned overwhelming support in 2012. So opening channels for communication is not just the flavor of the month, but it's been touted as something of an elixir for governance ills.

Here's the problem: dialogue can fail. The Investor Responsibility Research Center Institute's (IRRCi) seminal study on corporate and shareowner engagement demonstrated that investors and corporations define success differently. Today, truly innovative ideas—including canny use of social media—have quietly surfaced to meet that challenge. Before spotlighting them, let's identify a checklist of five parameters that can help determine whether dialogue succeeds or fails.

1. When and how often should engagement occur? Some firms are purely reactive; they convene a dialogue with investors only when they have to, such as when a say-on-pay vote is defeated, in the wake of a crisis, or when an investor requests an urgent meeting to express frustration with some corporate action. We think that's a mistake. It is too late to be proactive or demonstrate leadership—the company has already suffered harm and is in damage control mode. Better to install regular, periodic, preventative engagement to build long-term relationships of trust with investors. That way the odds of a surprise say-on-pay defeat are low, and the market damage from inevitable business disappointments may be mitigated by a firewall of shareowner confidence. Finally, unless there is a specific pending issue, companies should avoid asking investors to meet during the frenzy of the proxy season. It's better to establish an ongoing relationship when shareholders have more time available.

2. Which investors should be in the room? Some companies pick their largest investors and invite them to a session. Others offer a more inclusive meeting, with invitations to any significant institution on the register. In other cases, perhaps the majority, the encounter is one-on-one with a particularly influential, or particularly disgruntled, shareowner. (And that is virtually always the case when the dialogue is initiated by the investor.) There are lots of variations. In general, smaller groups are more productive. But companies that produce information that seems to satisfy those investors should consider posting it to their Websites or including it in their proxy materials.

The risk of having the wrong investor representatives in the room can be reduced by preparatory work, including jointly setting the agenda beforehand, outlining the expectations of both sides, and exchanging a list of those likely to attend.

3. Which corporate representatives should attend? Increasingly, shareowners want to talk to directors, not just management. The key is to tailor the personnel to the topic. For governance concerns, the lead director, independent chair, or the chair of the nomination and governance committee should be on hand. For compensation issues the chair of the compensation committee should attend a meeting that focuses on compensation issues. And corporate officials usually are best for execution issues. Companies also usually want at least the general counsel or corporate secretary in the room to protect company interests and patrol Regulation Fair Disclosure rules. Either way, directors need to be briefed on the investors themselves and the discussion points. Board members best suited for the task are those who listen as much as they explain. Temperament is a vital ingredient in talks. Board members who come across as defensive, disrespectful, or unresponsive won't do the company any good.

4. Which investor professionals should be in the room? Some funds send their governance managers, others portfolio managers, and some send both. The IRRCi study reveals that about a third of institutional investors engage with more than ten companies a year. Those investors are likely to be experienced and professional. But about 60 percent of institutional investors have such dialogues less than five times a year. As a result, companies sometimes complain that inexperienced or uninformed investors attend, which winds up irritating directors rather than adding value. Even if interlocutors bear useful ideas for the company, few will have worked in business or have served on a corporate board, and so may come off—remember, temperament matters—as arrogant and presumptuous. The risk of having the wrong investor representatives in the room can be reduced by preparatory work, including jointly setting the agenda beforehand, outlining the expectations of both sides, and exchanging a list of those likely to attend.  

5. Setting the agenda. Legal safeguards play a role here. Reg FD is no barrier to investor-board dialogue on governance matters. Any general counsel who tells a board otherwise has to rebut Securities and Exchange Committee guidance, which provides plenty of leeway on the topic. Moreover, citing Reg. FD as a reason not to meet is viewed as simply being obstructionist by investors. However, Reg. FD does set some limits. For example, matters deemed price sensitive cannot be addressed in selective meetings. This leaves a lot of ground for discussion. The best ideas we've seen include setting an agenda ahead of time in consultation with key shareowners and guarding against the assumption many directors and managers have that dialogue is primarily for the purpose of expounding on company policy. To win investor confidence that the board is responsive, directors must patiently listen to criticisms and be relevant. One of investors' biggest complaints is that they too often receive the standard IR presentation.

Of all the variables affecting the outcome of dialogue, perhaps the trickiest is building quality into the investor side of engagement. The United Kingdom's Institute of Chartered Secretaries and Administrators (ICSA) floated an intriguing idea last month in its report, Improving Engagement Practices Between Companies and Institutional Investors. It suggested, of all things, a mobile app to facilitate dialogue. Company directors and executives would be able to anonymously rate the effectiveness of investors with whom they engage. After a meeting, using a smart phone they would log in, note the professional rank of the person they just met with, and then score the investor by answering a handful of telling questions. Was the investor properly prepared for the meeting? Did the investor ask about or show an understanding of the long-term strategy of the business? Did the investor ask about or show knowledge of the business model? Did the investor ask relevant questions? How much did you benefit from the meeting?

The ICSA proposed that an independent body collate wiki-style responses and post them. The assumption is that poor marks from companies would prompt low-scoring funds to improve their game.

Should someone develop an equivalent tool to rate the quality of corporate outreach to investors? There is no app for that now. But shareowners do have a powerful, if low-tech way to express themselves if they rate a board as unresponsive. They can vote no at the next director election.