By contrast, Chairmen and CEOs seeking to demonstrate their infallibility – believing this will win over investors – are likely to arouse suspicions and intensify existing concerns. One institutional investor I know always asks “What worries you?” at the end of a meeting in order to calibrate the degree of candor of the discussion. When the response is the equivalent of “everything is great” or “only unforeseen external developments,” that investor will substantially discount the preceding dialogue.
Ideally boards should propose remedial action when they acknowledge any deficiencies. At one technology services firm, the senior independent director told a leading shareholder that the non-executive directors possessed insufficient understanding of the company’s business and that, consequently, the board was looking to appoint additional outside directors with international business and telecommunications experience.
Effective board – shareholder communication also requires that shareholders have adequate time to respond. The Chairman of one European retailer called the company’s largest shareholders over a weekend to inform them that, on Monday morning, the board would announce that it was combining the Chairman and CEO roles. Unsurprisingly, this tactic provoked a furious response and the board was subsequently forced to engage in extensive consultations over several months to placate angry shareholders.
Quality of discussion, particularly when sensitive topics are on the agenda, is often inversely proportional to the number of people in the room. As a principle, both sides should strive to minimize the number of attendees. Consistency in communication is important because institutional shareholders increasingly speak with each other in informal shareholder groups, including across national boundaries. That said, divergent viewpoints are not necessarily problematic, as long as they do not reflect a dysfunctional board, and they can even provide comfort to investors that the board is rigorous and serious. At one company, investors actually felt reassured when the SID told them there was a healthy debate among board members about how to rebuild the capital base.
In some countries, companies are engaging shareholders in groups. Such meetings require some degree of orchestration – for example, discussing only issues of concern to all investors – and it is therefore important for boards to follow up with individuals to ensure that their key concerns have been disclosed. These include “outlier” issues that might have been omitted from group discussion but could still influence voting decisions.
Linguistic and cultural barriers, meanwhile, need to be addressed when communication takes place across national borders. Where possible, boards should strive to adapt their communication styles to match those of their investors. Similarly, shareholders need to play their part to bridge this gap. One London-based asset manager, for instance, fields an engagement team with fluency in more than 15 languages. In addition, foreign investors can join local shareholder associations to better understand local business and governance practices and collaborate on certain matters.
This article is primarily addressed at companies and their boards of directors. But as the last example illustrates, shareholders must also play their part by gaining a good understanding of the company, acknowledging the challenges involved in running a listed firm, adopting a principled but pragmatic approach to corporate governance, and, most importantly, demonstrating an ability to keep confidences. When one investor told a CEO that he appreciated how difficult it must be to turn around a conglomerate with an entrenched culture, the previously guarded CEO quickly opened up and admitted that “it has been extremely frustrating how few people understand the enormity of the task.”
In addition, shareholders should be forthcoming with their own views and be willing to ask direct, contentious questions.
It is in the interest of companies to improve this two-way flow. Those that strive to build relationships based on trust and follow a pragmatic approach to meetings will likely be rewarded in the long term.
Simon C.Y. Wong is an independent advisor and Adjunct Professor of Law at Northwestern University School of Law. Previously, he was Head of Corporate Governance in the London office of Barclays Global Investors and a management consultant at McKinsey & Company.