A few weeks ago several large institutional investors identified as the Shareholder-Director Exchange (SDX) Working Group sent a letter to the lead directors and corporate secretaries of Russell 1000 companies asking them to consider shareholder-director engagement as an enhancement to their corporate governance. The financial media and other commentators have picked up the theme and seem to be building a case that direct communication between shareholders and directors is a governance best practice.
What is the Shareholder-Director Exchange?
SDX describes itself as a working group of public company directors, institutional investors and advisory firms that offers “the collective best thinking of a broad group of leading corporate governance practitioners on why, how, and when boards and institutional investors should engage directly with each other.” SDX has developed what they call the “SDX Protocol” as a “template for discussing and addressing corporate issues in the normal course of business.”
What did the SDX letter say?
SDX believes that engagement between shareholders and directors “is an idea whose time has come.” They want public companies to “consider formally adopting a policy providing for shareholder-director engagement,” whether pursuant to the SDX Protocol or otherwise. They cite JPMorgan, The Home Depot, Microsoft, UnitedHeath Group and EMC as companies who have “pursued meaningful shareholder-director engagement as part of their broader corporate governance efforts.”
Is shareholder-director engagement really such a good idea?
On the surface, this sounds like good corporate governance. After all, what could be wrong with opening additional lines of communication and enhancing transparency? It seems to me, however, that a policy of regular shareholder-director engagement is unnecessary and potentially counterproductive.
It’s good to remember that the primary role of directors is to oversee the management and operations of the company. They select senior management, which is charged with operating the company, advise senior management and monitor their performance. Most companies’ bylaws and corporate governance guidelines contain language similar to or consistent with those concepts. Few such documents list investor relations or shareholder communications among the directors’ responsibilities.
The point is that management operates the company, which includes managing the flow of information to the public and the shareholders. Companies have specifically trained investor relationship personnel and detailed internal processes (disclosure controls and procedures) designed to be sure the company speaks with a consistent voice across all areas of operations. (See Keys to an Effective Communications Program.)
What could go wrong?
Here are some commonly cited reasons to limit director contact with shareholders, which may or may not apply to individual directors or boards:
A director may not be fully informed as to the nuances of every issue a (sometimes aggressive) shareholder may want to discuss.
A director may not fully understand how certain information fits within the company’s overall disclosure and communication strategy.
Such communications enhance the possibility of Regulation FD violations.
Some directors may have a perspective or agenda that is inconsistent with the majority, and therefore controlling, views of the board as a whole.
A director may not be adept at the precise communication required to ensure that his or her words are not misconstrued, taken out of context, exaggerated or otherwise used against the company.
Directors are already stretched too thin dealing with ever-increasing governance and oversight responsibilities.
None of this is to say that directors are not intelligent, talented and well-informed. Presumably, they would not be directors if that were not true. And it’s natural that institutional investors always seek ways to gain additional insight and information. And it’s true that shareholder engagement is a good thing as a general proposition. (See this Doug’s Note.) And there may well be specific instances when direct shareholder-director engagement makes sense (such as addressing a sensitive say-on-pay issue).