New Protocol for Discussions Between Boards and Institutional Shareholders

By Cydney Posner

This column from the NYT's DealBook discusses an effort by "an unlikely alliance of investors, board members and advisers" to set up a "protocol" designed "to provide companies, boards and investors with the self-help tools they need to avoid sudden blowups." With so many activist hedge funds taking on companies, management is sometimes "blindsided when traditionally passive investors suddenly side with an insurgent hedge fund pressing management for change." By providing "a template for healthy relations between investors and directors around the country," the working group, the Shareholder-Director Exchange, hopes to provide an outlet to smooth "strained relations" between institutional shareholders and companies and thus ultimately "to counter the disproportionate influence of activist hedge funds on corporate America."

The Exchange includes representatives from large institutional investors and board members from large companies, but no activists. The protocol provides "a voluntary set of standards that companies and investors can adopt, [under which] boards will be encouraged to meet with longtime shareholders to discuss issues of corporate governance, management performance and deal activity, as needed. The purpose is not for board members and shareholders to discuss operations, financial results or return-of-capital plans — topics that are more appropriate for management, " and more likely to cause discussions to run afoul of Reg FD. According to one director, "'[w]hen shareholders want to talk to directors, it's because they hate the pay program, they don't like the C.E.O. or they want to know how directors are thinking about other governance issues, such as destaggering the board'…..The protocol states that when either a company or an investor wants to engage with the other, they will approach designated contacts, like a corporate secretary, and request a meeting. The other party will acknowledge the request as soon as possible, and agree to meet within 20 business days. When the sides do meet, the goal is to create an environment where frank discussions can occur. The protocol calls for the independent nonexecutive chairman or other lead directors to attend, and for senior members of the institutional investment group to participate. Management, lawyers and bankers are discouraged from attending the meetings. The protocol suggests that meetings be between a company and one investor, but it allows for flexibility, so that several investors could approach directors about similar concerns. It also suggests that shareholders might attend board committee meetings or strategy retreats, or special investor days. Once both parties air their grievances, the boards and investors are encouraged to commit to next steps resulting from the meeting, and to share the information about the engagement with other board members, management and other investor colleagues."

Recently, activists have been very vocal, through social media and otherwise, about their demands on companies they view as underperforming. According to a consulting firm representative that helped organize the Exchange, "[i]ncreasingly, activists are enlisting the support of institutional shareholders, who often feel disconnected from a company's board and management because dialogue is rare." (For more on this trend, see my emails of 10/3/13 and 8/21/13.) If a tweet from an activist can wreak havoc in a company's stock, "that means shareholders are disconnected enough from the board's message that they are responding to a 140-character message and not trusting [the company's] directors. It's not healthy for the financial system." Moreover, because activists have been so vocal with their complaints, "they are often granted unusual access to management and directors…. Many companies, by contrast, speak to their largest shareholders a couple of times a year."

According to the article, at this point, "the project is little more than an idea." But a number of large investors and directors at big companies have committed to the process. "Though companies need not commit to specific changes for the meeting to be deemed a success, ‘an important element of engagement is each party's willingness to listen carefully to one another and to take action in response to valid concerns,' the protocol states." <br>

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