AS the power struggle between big shareholder groups and powerful business interest seems destined to intensify, corporate boards must move to strengthen their communication capabilities or risk being sidelined in the debate.
The battle lines are being drawn between institutional investors determined to gain greater access to corporate boards and the business lobby rallying to protect corporate directors and executives from expensive shareholder suits, prosecution and costly regulation.
The US Securities and Exchange Commission and the thousands of companies its regulates may find themselves squeezed and stretched in the middle of the conflict. There is a risk that the struggle could drive a wedge between corporate boards and their shareholders and further strain relations between the two.
At the same time, proposed new regulations will make it easier for shareholders to battle boards in proxy fights and make it harder for directors to secure votes for their election. Combined with a steady move to a Web-based disclosure system, this could leave corporate directors and executives in a vulnerable position as their control over the machinery of shareholder communication is diminished.
Shareholders Push For Access as Industry Lobbies for Limits
Two weeks ago, some of the world’s biggest public pension plans representing $34 trillion in assets wrote to U.S. Securities and Exchange Commission chairman Christopher Cox urging the commission to give shareholders greater input into how company directors are elected.
They argued that shareholders in US companies “lack basic rights which they take for granted in other developed countries” and urged the commission to support a recent court judgment that gives shareholders greater say-so in how directors are elected at public companies. The SEC is set to review the judgment and clarify its policy at a December commission meeting.
In their letter, the investors express frustration at the lack of board responsiveness, which they blame on entrenched directors having no incentive to demonstrate accountability under current laws and regulations which shield them from being ousted.
At the same time, the Financial Times reports that a group of large international investors, including giant UK fund manager Hermes, New York-based Amalgamated Bank and mutual fund Delaware Investments, have formed an alliance to engage boards in UK-style consultations. Their first targets are companies that have had options backdating investigations.
Meanwhile, the investor moves come at a time when the business lobby is pushing back against existing regulations it views as excessive and expensive. According to the New York Times, two industry groups with close ties to the Bush administration are drafting proposals to limit investors’ rights to sue companies and their auditors and dilute the power of government prosecutors.
According to the newspaper, the groups want to limit the liability of accounting firms, force prosecutors to target individuals rather than companies, and to scale back shareholder lawsuits. They also hope to undo aspects of the Sarbanes-Oxley Act and scrap decades-old rules and policies. The recommendations are being tailored so that they can be adopted through rulemaking by the SEC.
Shareholders Get Better Arsenal For Board PR Battles
While the pressure from opposing sides is likely to create a testing environment for the SEC, for companies the outcome may be largely academic. Win or lose, shareholders seem determined to bend corporate boards to their will and make them more accountable. Strong support for majority vote resolutions this past proxy season is one example of shareholders’ determination to force change.
Adding to shareholders’ firepower, recent regulatory measures expected to come into force in the 2008 proxy season will make it easier and cheaper for them to challenge companies in proxy fights. The SEC’s e-proxy proposal will give shareholders greater latitude to challenge companies in proxy battles using the Web instead of only costly printed materials.
At the same time, directors of New York Stock Exchange-listed companies will no longer be able to receive broker non-votes in their favor. According to Institutional Shareholder Services, without these votes directors at some companies may have failed to get a majority of the votes this year. And receiving a majority of votes cast rather than a plurality is fast becoming the de facto standard.
In this environment, strong communications and a believable commitment to open dialog could go a long way to helping companies build or reinforce good relations with their shareholders. Shareholders are generally seeking greater accountability from directors and more access to provide input. This provides an opportunity for forward-thinking boards to use proactive communications to demonstrate accountability and encourage input from those who elect them.
However, our site reviews of more than 500 of the world’s biggest listed firms finds that companies’ current board communication practices are ineffective. They have failed to adapt their practices to new technologies and audience trends over the past several years.
Boards Need to Adapt Communications for the Web
While prevailing corporate disclosure and communication practices were conceived in a paper-based era, most communication today is conducted online. This has important implications for communicators because investors’ perceptions of companies can be influenced by factors which many companies may not yet understand.
At its most basic level, communicating online is more complex than doing so on paper. While the information companies provide on paper differs by company, the user experience is essentially the same — turning pages in a printed document. On the Web, however, not only do companies provide different levels of disclosure, but there is a vast difference in the user experience. Companies can and do present their information in a myriad ways, often without being cognizant of the potential impact on readers’ perceptions.
Academic research shows that online interaction experiences influence investors’ credibility perceptions of the disclosure and the company itself. The importance of the interaction experience to particular users varies by their relative sophistication, but it is always a factor in their opinions.
This means that plain, full and accurate disclosure may not be sufficient for boards to maintain or reinforce a company’s reputation if they are not simultaneously paying attention to how the information is delivered and presented to investors.
For boards communicating in the 21st century it is essential to address the effectiveness of their online communications with shareholders — both the comparability of information and the user experience of the company’s website. Critically, companies should act sooner rather than later to gain valuable experience ahead of the 2008 proxy season.
There are several concrete steps that boards and management can take now:
- Assess the effectiveness of the company’s current online corporate governance communication relative to a broad group of similar-sized companies both in and outside their industry as well as locally and abroad.
- Evaluate and implement improvements to the upcoming proxy season communication process to test and measure tactics and strategies designed to increase participation, dialog and strengthen perceptions of board accountability.
- Increase the frequency of board communication with shareholders about the board’s activities and encourage input from all shareholders on the boards’ performance.
- Ensure that investors have easy online access to current and past annual meeting proceedings, documents and voting results.
- Draft all shareholder communications with the understanding that they will be accessed and used primarily online rather than in printed form.
The coming years will likely prove challenging for companies as they come to terms with increasing demands from shareholders for greater access and board accountability and responsiveness. Effective communication, underpinned by a genuine sense of duty to the shareholders who elect them, may be one of the best insurance policies today’s directors and executives have against potentially acrimonious proxy fights and expensive litigation.
IR Web Report provides a variety of guidelines to members to help them improve their online board communications. Assessments of corporate governance communications are included in our six monthly reports to members. In addition, we offer a standalone corporate governance communication review to provide a more focused evaluation and recommendations.