Shareholders and directors – communicating effectively

25 Feb 2014

A newly suggested protocol for shareholder-director engagement suggests that a framework for communication between the two might help perspective-sharing and benefit both investors and management.

The ‘SDX protocol’ aims to address differences between directors and shareholders and promote direct, predictable and safe communication between them.

The chair of the Shareholder Director Exchange (SDX) working group described the protocol as simply “making it easier to engage”, adding that it might help avoid “costly proxy battles” and would help “boards be braver about resisting short-term voices that they hear on analyst calls”.

But according to two PwC surveys, that gap won’t be easy to bridge. The surveys, collated in the report ‘What matters in the boardroom’ show that substantial behavioural change is required if shareholders and directors are going to be able to communicate effectively.

For example, when it comes to executive compensation, 92% of investors think it’s appropriate and important for the directors to engage, but 65% of directors think that it’s not appropriate or important.

In the UK and Europe, it is more usual for board directors to meet shareholders in a variety of situations, in the US, the environment for director-shareholder relations is tougher.

“Engagement with shareholders should mean proactive outreach, and clear, direct and honest communications about how and why decisions are being made…And the board of directors is – or ought to be – a central player in shareholder engagement.” Mary Jo White, SEC chairman

Same goal, different experiences

“We prepared the report to compare the responses of these two groups to identify areas where viewpoints are shared or differences exist” said Mary Ann Cloyd, Leader of PwC’s Center for Board Governance. “And we found that perspectives largely depend on whose shoes you are in – directors or investors.”

Each group surveyed experienced many of the same events in very different ways – despite their nominal shared goal of long-term profitability of the company they either serve on the Board of, or own a stake in.

But among the differences there were common threads too. The first was that overall, there is a trend of increasing communication, and each group wants to get a foothold and derive value from any engagement. Around 30% of direcetors reported increased communication with institutional investors.

And both groups’ approach to increasing communication is affected strongly by circumstance: investors want to talk more about a lot of issues. But directors don’t want to communicate on many topics because they’re concerned about Fair Disclosure regulations or mixed messages. In fact 39% of directors surveyed do not speak with institutional investors at all.

Protocol to improve engagement

The SDX Protocol aims to address these differences using those common threads, without usurping management’s primary role in investor relations. For directors, it offers the possibility of more influence over proxy voting decisions on company proposals. For shareholders, it suggests that following the protocol will help them to influence governance policies and practices.

The protocol sets out a framework that suggests both parties cover the following before engaging:

  • A clear policy for engagement
  • Proper identification of the engagement topics
  • Establishing contacts for requesting and responding to an engagement
  • Selecting the participants to represent the parties during the engagement
  • Determining the medium of engagement – individual investor meetings, group meetings etc
  • Preparing for the engagement – reviewing relevant material

And the following after engaging:

  • Agreeing specific next steps resulting from the discussion and how to communicate to those who were not present
  • Agreeing to review the engagements on an annual basis and revising engagement approaches as necessary