For many decades, independent directors in most public companies generally avoided face-to-face interaction with stockholders. At most, large stockholders would receive a visit from management on a swing through New York or occasionally a couple of other East Coast cities with a high concentration of the investing community. And the odd gadfly stockholder could sometimes intercede with a question at an annual meeting where directors may make an appearance. In many respects, board members remained insulated from direct pressure, save for the occasional hostile attempt in an M&A situation or the like.
This suited companies for a number of reasons. Independent board members often have other responsibilities, and thus may not want to devote the additional time to stockholder interaction. These directors also may prefer that management act as a filter on communications – of course, management may prefer the same as well.
About five years ago, this pattern shifted fundamentally, particularly for technology companies, when activist investing firms discovered companies in Silicon Valley. When an activist makes a foray into a stock, suddenly management often engages on an urgent basis, and, not uncommonly, one or more outside directors also may become directly involved in the conversation. Left unsaid is the fear that not engaging will provoke an activist into a full-scale fight to oust the board. However, such engagements are likely made very cautiously and without the benefit of a truly open dialogue, in no small part out of fear that whatever words the company uses will be twisted out of context and mischaracterized should the activist position turn into a full-fledged fight with the board.
Yet, absent the threat of a sword-wielding activist, is there some middle ground for communications between “ordinary” institutional stockholders and those most directly empowered by stockholders to act on their behalf – outside directors? A somewhat unusual alliance operating under the name of the Stockholder Director Exchange (SDX) would like to lead you to believe so. The SDX is the brainchild of a law firm (a beast not unknown to publicity generation), a couple of consultancies hitherto not particularly known for corporate governance thought leadership, as well as Broadridge Financial Solutions, which for all intents and purposes is a monopolist in the proxy administration sphere, though it is unclear why it is eager to stick its head up in this domain. More interesting, however, is that the SDX has garnered the support of some blue-chip, highly regarded investment managers. These managers signed onto a letter sent to a broad swath of US issuers in July encouraging the adoption of the SDX protocol, thereby kicking up a small flurry of publicity.
The SDX core tenets on their surface appear uncontroversial: have a policy of engagement, identify the people from both sides to engage and the conversation topics ahead of time and be careful to avoid running afoul of Regulation FD, concerning selective disclosure of material non-public information. It is all pretty bland stuff, save for the starting premise of having outside directors regularly talk to stockholders in the first place.
Notwithstanding the SDX’s self-publicized rubric, boards should individually analyze their appetite to meet with large investors. Many boards already have evolved in their thinking and have various stages of engagement with large stockholders. Most boards who chose to do so will likely delegate it to one or more designated directors. There are, however, hypothetical situations in which a policy could run afoul of a company’s interests. For example, if an activist investor takes a large stake in a company, and the company has adopted a formalized public policy of talking to stockholders owning more than a certain percentage threshold, must the company then engage with the activist, even if the activist is publicly releasing broadsides against the company? Also, what if the SDX protocols change over time?
That said, nothing prevents independent directors, when acting in concert and with the knowledge and consent of the full board, from communicating with stockholders and relaying stockholder concerns to the board as a whole, as well as to management. When doing so, it would be best to schedule such meeting(s) shortly after the company’s quarterly earnings announcement to mitigate fears of selective disclosure.
Some companies may view adopting an explicit policy as a way to preempt accusations by future activists that such companies are entrenched and refuse to engage. Other companies may well want to consider waiting from the sidelines. This is particularly so given there is no regulatory mandate to adopt any such policies. Engaging – on an ad hoc basis, from time to time, within prudent limits – may avoid binding the board in advance while preserving maximum flexibility.