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Reader Profile

William Keiper
Managing Partner
FirstGlobal Partners LLC

Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. This past month we asked for ideas on improving the effectiveness of the annual meeting of shareholders. Here is a selection of responses. If you'd like to participate in this section in the future, please email Scott Chase.

Is there a difference between shareholder engagement, challenge, and activism?

Shareholder objectives for interaction with board members are based upon investment philosophy, long-term versus short-term investment horizon, and many other variables. The degree of engagement for communication between board members and shareholders can be viewed along a continuum representing the relative importance of the issue at hand and the depth of shareholder interest as evidenced by a willingness to spend time, effort, and money on the process. On one end of the spectrum is traditional ‘vanilla’ investor relations and on the other a committed proxy fight with the objective of changing the make-up of the board.

Simple board member ‘engagement’ with an investor is often characterized by an informal one-on-one dialogue. This type of communication typically will involve issues of interest to most investors and not an agenda specific to the shareholder involved. Committed shareholder ‘challenge’ or ‘activism’ is more often initiated with the objective of generating a board response that is compliant with the shareholder’s specific demand. A shareholder activist may in fact insist that specific, timely action be taken by the board, failing which, escalation may include concerted public opposition to director reelection. An activist agenda (especially that of a noisy “short” or a short-term holder) may not represent the interests of most, or even some, of the other shareholders.

Is the frequency of engagement between shareholders and boards on the rise?

A first-of-its-kind study, The State of Engagement between U.S. Corporations and Shareholders, was recently published which confirmed that the answer to the question about an increasing level of shareholder engagement is definitely yes. The study was conducted during 2010 by Institutional Shareholder Services (ISS) for the Investor Responsibility Research Center Institute. It is the first instance of benchmarking the level of such engagement and was accomplished through a survey of 335 issuers of stock and 161 asset owners and managers. This study confirms that engagement between issuers and investors is more and more common, is increasing in frequency, and covers more subject areas than ever before. The irony is that this increase in shareholder engagement with boards coincides with the all-time high in the rate of investor equity churn.

Are there best practices or rules of engagement for boards to follow when challenged by shareholders?

The best boards will anticipate and actively seek inputs from rational and responsible shareholders. All boards should have or develop a proactive plan for investor interaction, especially with long-term, buy-and-hold, shareholders. Such a plan should be based upon the assumption that directors and key shareholders share the interest of company value creation over time for the benefit of all stakeholders.

A communication plan can be developed by the board which anticipates likely shareholder concerns given the company’s unique profile. For any formal interaction between a shareholder and a board member there should be an agenda, ground rules that accommodate the directors’ fiduciary responsibility and insider status, agreement that the dialogue will be based upon mutual interest and respect, and a discussion, in advance, of the expectations of each for the outcome of the communication.

There has been much recent change in the level and tenor of shareholder communication with boards. Where do you see this going over the next couple of years?

Shareholders will likely want more answers to short-term business and performance questions, making it ever more challenging for boards to maintain a longer-term perspective. The reality is that even insightful and influential shareholders enjoy the freedom to communicate their views about what should have or should be done with no (or limited) liability for the consequences. Board members not only have a fiduciary responsibility to all shareholders in the management of the company’s business, but also the potential of legal liability for their decisions.

Going forward, boards will be expected to both hear from and listen to active shareholders on all types of issues, including strategic direction, board quality and composition, and governance practices. There certainly will be an escalation of shareholder interest in and an expectation of influence upon issues relating to executive compensation, company performance metrics, succession, and increasing interest in the so-called ESG issues: environmental, social and governance. The Dodd-Frank Act and SEC Rule 14a-11 are just two indicators that the level of interest in these and other topics will continue to escalate.

Do you have any ideas for board members to consider in support of the proposition that good governance leads to good shareholder relations?

I believe the activity of the nominating and corporate governance committee should be expanded to include responsibility for regular non-executive board member interaction with key shareholders. Committee members would take the lead in developing board position statements on issues that are now, or obviously will be, of concern to shareholders with a long-term investment horizon. The process of creating these statements has the added benefit for the board of privately reaching a consensus of opinion on key issues.

A senior board member could also participate in selected investor forums including a company’s annual investor day. Simply hearing questions that are on the minds of investors can help board members create some balance for management’s views as expressed in the board room.

I also support substantive, minimum share ownership requirements for board members. This is a tangible and visible indication of board member alignment with the interests of shareholders.

Think of these kinds of board initiatives as “board activism” anticipating issues that might otherwise ultimately lead to shareholder activism.

What is your best advice for board members to follow in their interactions with shareholders?

When all is said and done the relationship between investors and boards is one of owners dealing with other owners. Consequently, board governance should reflect a long-term ownership mentality. Despite this reality, due to public company regulatory and disclosure requirements, professional legal and financial advisors will almost without thinking urge non-executive directors to keep their distance from shareholders. Failing to actively engage with shareholders is completely at odds with having assumed responsibility for investors’ capital with a mutual expectation of risk-adjusted returns.

All relationships require release valves—the relationship of shareholders and boards is no exception. Open communication (with full regard for board responsibilities and legal requirements) creates an opportunity for mutual contribution to business value creation. Having been a board member of six U.S. public companies I have experienced firsthand the value and the challenge of open dialogue with shareholders even when it is uncomfortable. Intel refers to these types of communications as “constructive confrontation.” If managed correctly, these kinds of interactions can add perspective and fuel to the creation of improved business value for all stakeholders.

William Keiper is a trusted advisor to boards, owners, and investors. He brings over 30 years of diverse business experience to the most difficult of business and board challenges. His board leadership and advisory experience was earned while serving as chairman, CEO, president and board member of numerous public and private companies. This experience includes transitions involving boards, management, owners and investors. He is considered a thought leader in the rapidly evolving dynamic of board and shareholder activism. He can be contacted at will@firstglobalpartners.com.

FirstGlobal Partners is led by Mr. Keiper who directs all activities of the firm. FirstGlobal provides expertise for progressive investors and boards in reaching their mutual objective of creating business value.