In the UK, shareholder engagement has become a top priority for boards of directors. Not only are activist shareholders taking a direct role in decision-making, but also even smaller shareholders are making their feelings known when the board makes an unpopular move. As PwC puts it: “The lively environment makes it all the more important for directors to engage with shareholders.” Diligent’s board portal provides the support directors need to manage this process.
Importance of Director-Shareholder Communication
The results of poor communication between UK directors and shareholders can be devastating.
In the UK, the lively activist environment means it’s even more important for companies to engage proactively with their shareholders, as PwC points out in a recent report. Only a few years ago, most UK boards left communications with shareholders to management; directors only met with shareholders at the AGM, and preferred matters that way. But the institution of shareholder ‘say-on-pay’ in the UK under corporate law has gone a long way to change all that.
“As companies’ shareholder engagement efforts grow, directors play increasingly important roles in interacting with shareholders. Increasingly, many corporate governance subjects are important to both directors of public boards and investors in public companies. Companies are always balancing their focus on short-term performance vs long-term value for shareholders. Directors have also started meeting with major shareholders when there were high-profile shareholder proposal campaigns and proxy contests. Given the rise of activist investors, it’s critical for directors to build relationships with major investors before any challenges arise. We’re now in a new engagement landscape,” the PwC report points out.
Maintaining Communication With Shareholders
Boards are advised by experts to maintain communications with shareholders.
Directors should know their significant shareholders and their share positions. Knowledge of one’s investors is critical in today’s environment. Many institutional investors are increasingly focused on active investment management, with managed funds pursuing better returns, putting more pressure on issuers to understand the concerns and objectives of their shareholders.
See how a board portal can help prepare the board of directors for shareholder communications.
The result is that uninformed boards can become surprised boards. For boards to better understand their investors, it is valuable as a starting point to establish a regular process whereby management provides to the board information about their most significant shareholders.
In advance of setting up shareholder meetings, the board should work with management to determine the following information concerning their significant investors: The investor’s strategy, philosophy, track record and cost basis (if possible); percentage holding of the issuer and whether the investor has been adding to or reducing its position; and the structure and hierarchy behind the investor’s decision-making process. How the investor votes (for example, does the investor outsource its voting to a proxy advisory firm?); the percentage of the investor’s portfolio that the company comprises; any and all material policy restrictions under which the investor operates.
Boards should also be aware of the aggregate short position in the company’s shares as well as any individually significant positions and factor that into their overall shareholder engagement plans.
Another fundamental piece that can only be learned once engagement has begun is the investor’s rationale for owning shares in the company. A critical question from a board to an investor should be ‘what opportunities do you see in holding our stock?’ It can spark a valuable interchange between both groups because it reveals whether there is any disconnect between shareholder expectations and what has been built into the board-approved strategy.
There should be a fixed process to arrange communication with shareholders, one that defines which kind of communication for which specific investor. Large shareholders should receive regular reports, as well as scheduling discussions with board members as often as possible.
But communication with smaller shareholders should not be ignored, or left to investor relations. Bulletins should go out from the board to all shareholders, and an interactive process should be set up in which questions from small shareholders are taken directly by board members. Failing to do this can lead to public embarrassment, as outcry from a large number of shareholders reaches the media.
Diligent Board Portals Organise Shareholder Communication
To manage company board member communications with shareholders, it’s imperative that the board have a strong communication foundation already in place. A board portal allows directors to operate in a secure environment for their own communication, while monitoring the process of interacting with shareholders.
The Diligent Boards portal enables real-time communications among board members via talk, messaging and email. This permits board members to coordinate communications efforts, agreeing on what should be discussed with major shareholders, and arriving at a consensus for reporting to smaller shareholders. All of these discussions can be documented on the board portal and shared with management or auditors – access to materials can be specifically tailored.
Previous shareholder communications, even tapes of conversations, can be kept on the Diligent Boards portal and made available to any directors who wish to consult them. Materials for consultation can be updated in real time.
The Diligent Boards portal can also provide a central location for summaries and links to news reports, blog posts, Twitter feeds and investor commentary – even input from shareholders. As all companies should count on being able to react to queries rapidly, directors can manage shareholder queries efficiently using the portal, counting on a reliable communications infrastructure.
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