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The Diligent team
GRC trends and insights

Corporate governance and shareholder relations

May 9, 2023
0 min read
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Historically, board directors have had little or no direct contact with shareholders. Since the financial crisis of 2008, shareholder activism has been increasing, and there's no sign of that changing in the near future. Shareholders elect board directors, but usually, it's 'one and done' and there isn't much contact between them after that. Shareholder activism tends to arise when there's been too long a waiting period for long-term gains. Shareholders usually want to see some positive action in the short term.

Large corporations aren't the only companies that hear from activist shareholders. A fair number of small corporations also face activists.

The question that corporations of all sizes face is whether they should break the mold and start speaking with shareholders directly or ride out the storm.

Boards that are willing to break with tradition and hear directly from investors before there is a problem often find that there are benefits for directors and shareholders in opening up communication. Board directors can benefit from hearing the bold truth from shareholders, and it gives investors the opportunity to hear the board's perspective that led to their decision-making.

Navigating Communications With Shareholders as Good Corporate Governance

The roadmap on how best to communicate with shareholders is unclear, leaving corporations to navigate communications as they see fit. Best practices have yet to define whether one- or two-way communications better enhance governance. Various corporations have tried it both ways. The ultimate benefit of increased communication between directors and shareholders lies in the information shared and gained regardless of the preferred method of communication.

One-Way Communication

Some boards have decided to open up communication with shareholders using a one-way communication format. They invite shareholders to the boardroom to offer their perspectives and opinions on strategic plans. Board directors are allowed to ask questions, but they don't make inquiries of the shareholders. Corporations that have tried this approach believe that there is a benefit for shareholders in creating a forum in which shareholders can be heard.

Two-Way Communication

Board directors typically have more faith in themselves than investors have faith in directors. Some corporations hold the belief that opening up two-way communication between directors and shareholders casts a light on the notion that both parties have compelling philosophies and views on strategic planning and governance matters. Some directors have been pleasantly surprised by the contributions from shareholders, which sometimes yield ideas and perspectives they hadn't considered prior to meeting with shareholders directly.

Using the Board Portal to Incorporate Shareholder Communications Into Planning

An electronic board portal is a good tool for board directors to engage in private, secure communications with each other about stock issues and shareholder matters. A board portal allows board directors to get potential activist concerns on the board agenda before shareholders turn to activism.

Productive Conversations Between Board Directors and Shareholders

The limited relationship between board directors and shareholders requires both parties to communicate their opinions clearly and succinctly.

Shareholders are looking for assurance that the board has a solid strategic direction. Credible metrics that assess performance show evidence that the board has plans for long-term sustainable growth. Board directors may wish to remind investors that stocks have cycles and point out to them where the company currently lies within a cycle. Board directors may also want to head off discussions about management and be prepared to defend their performance during times of temporary stock drops.

Executive compensation is another major topic where shareholders want increased disclosure. Shareholders gain confidence in board directors and managers when they know that compensation for executives is strongly tied to operational and financial results. Learning details about how pay incentivizes management to implement the corporate strategy, as well as how the compensation committee arrived at decisions, affirms to the shareholders that strategic plans are on track.

Role of Investor Relations Officers (IROs) in Shareholder Communication

Some corporations favor appointing an Investor Relations Officer (IRO) to serve as a liaison between the board and the shareholders. Part of the role of an IRO is to keep boards informed about how shareholders feel about the direction of the company. An IRO can be instrumental in restructuring protocols around shareholder agreements to the satisfaction of all parties.

For corporations where board directors don't engage directly with shareholders, an IRO has the responsibility to reaffirm the board's confidence in leadership.

Developing a Sound Plan for Shareholder Relations

Boards should develop a solid plan for communications before entering into relations with shareholders. Board directors should be clear about the objectives on their agenda and how interaction with shareholders will help to bring both parties onto the same page.

Boards may consider approving a basic policy that outlines which topics are relevant and the types of circumstances that warrant engagement with shareholders. The types of situations that call for shareholder engagement are varied, so policies will need to be broad and flexible.

Independent directors who have a good command of governance and strategic issues are generally well-suited to find the balance between board confidentiality and fair disclosure to shareholders.

When meeting with shareholders, board directors need to show solidarity with management. It's also helpful to have a few others present. Depending on the situation, it may be appropriate to invite the IRO, the general counsel or a subject matter expert.

Proceed With Shareholder Relations Cautiously and Allow for Flexibility

Allow enough time to answer the shareholders' questions. A skilled facilitator will be able to keep the meeting on track and moving forward, which will make the best use of time. If things go well, it could be the start of something great. Corporations should be prepared to continue working to enhance shareholder relations in order to ward off potential threats of shareholder activism.

Building relations between directors and shareholders is a concept that works differently for every corporation. Board directors should periodically 'take the temperature' of relations and how well they work when engaging for the short term, the long term or occasionally when situations warrant it. Investor perception studies and vulnerability assessments are invaluable tools for a proactive plan for investor relations to thwart shareholder activism.


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