Should Boards of Directors Communicate With Shareholders? Vanguard Says Yes. Many Directors Say No.

Shareholder-director communication has become a popular topic for corporations, most recently spurred by Vanguard's December 4, 2014 announcement that it will propose "shareholder liaison committees" to the boards of companies in which it is invested. As we head into the 2015 proxy season, there is increasing focus on shareholder-director communications due to a realization that it's risky for boards to wait until there is an issue before commencing engagement with investors. Indeed, Securities Exchange Commission (SEC) Chair Mary Jo White highlighted the emerging importance of shareholder-director engagement in late 2013 by saying, "the board of directors is - or ought to be - a central player in shareholder engagement."

The proposed benefits of director-shareholder communication are twofold:
1. Directors will benefit from hearing unvarnished views from shareholders.
2. Investors will benefit from hearing the board's philosophy and perspective related to certain governance and strategic issues, in turn justifying the board's decisions and actions.

Despite the recent popularity of the topic, many directors are passionately against the idea of engaging directly with shareholders. I've heard a variety of concerns in recent conversations with directors. They're afraid of the potential for violating Regulation Fair Disclosure. Additionally, some directors adamantly assert that "investor relations (IR) is not the board's job." These directors emphasize that IR is the responsibility of the company's management team and investor relations officer (IRO), whose job it is to relay all relevant shareholder insights back to the board for consideration within the board's agenda.

Directors also correctly point out that the board should not say anything out of step with management anyway, so they question the value of this effort, especially given limited available time that directors can devote. Moreover, some CEOs cringe at the idea of their directors having direct contact with investors. There is also the problem of unfair access: large investors would realistically be prioritized over smaller investors, never mind retail investors.

Digging deeper, most directors agree (though some reluctantly) that there are circumstances that warrant board involvement in investor meetings. If CEO-compensation is under fire, the board chairman or head of the compensation committee may need to engage to explain the philosophy behind the compensation program. If the CEO is personally under fire, the board chairman is typically the most relevant person to provide explanation and reassurance of the board's confidence in leadership. If there is a severe accounting restatement, the head of the audit committee may need to get involved.

Testimony from directors that have begun to engage with shareholders reveals that there are additional circumstances when engagement makes sense. Some boards invite shareholders to visit the boardroom to offer their views and opinions on strategic and governance issues. In these instances, the board is allowed to ask questions, but investors are not allowed to pose questions to the board, thus creating a one-way exchange of information rather than a true two-way discussion. Boards that have participated in this type of input from shareholders say it provides greater insight regarding investor views. These boards also believe there is a benefit to creating a safe forum for investors to feel heard. "Sometimes people just want to be heard," one director recently remarked.

Boards that have arranged for more two-way director-shareholder conversations have also attested to the benefits. The general counsel of a midcap company recently remarked, "Taking smart directors on the road works. There is a view among some shareholders that directors do not add value, so investors are pleasantly surprised when they meet with board members and find compelling philosophy and thinking around governance topics and constructive views on strategic matters. Similarly, directors are surprised to hear thoughtful, fair and prudent perspectives from shareholders, when they might otherwise expect certain investors to not be genuinely focused on creating long-term value."

Companies that have successfully arranged for directors to meet shareholders offer important recommendations:
• Have a policy. Companies should develop a policy to govern when director engagement makes sense, and that policy needs to be flexible enough to accommodate the realities of your board and the realities of certain circumstances. The policy should also address which topics are relevant for board-shareholder discussion.
• Identify which directors are best suited for the job. Some directors have better command of governance and/or strategic issues and are more adept at remaining within fair disclosure bounds.
• Have an agenda. There should be a clear mandate for the interaction - why is it in the best interest of the company, how can the meeting help build consensus or clarity and what are the objectives.
• Ensure alignment with management. Boards must be deliver messaging that is consistent with management in order to demonstrate alignment rather than expose discord.
• Never do it alone. For obvious reasons, directors should always be accompanied by the IRO. Companies should also consider involving their general counsel and possibly a subject-matter expert. For example, if the discussion will focus on compensation, it may be helpful (if not necessary) to bring the head of human resources who can speak to additional detail.
• Beware of the check-the-box approach. Both directors and shareholders have limited time available, so it's important to make the engagement as effective as possible, and appropriately tailored to the interests and expertise of each side. In addition, once a company commences board-investor engagement, it may be hard to stop. Make sure your company is prepared to view this as a long-term aspect of your IR program.

Director-shareholder engagement may not advisable for every board for a number of legitimate reasons. But there is no question it is an emerging practice. Those who have engaged say it is worthwhile and can be a powerful strategy to strengthen shareholder relationships in an age of increasing investor activism.