Look Who’s Talking … Again

Increasingly, its corporate directors.  That’s a key highlight from a snapshot summary of the National Association of Corporate Director’s (NACD) annual Public Company Governance Survey, which reported that 58% of respondents said a representative from their board(s) met with an institutional investor over the last 12 months.  This is up from 50% reporting same in the prior year.

Driving this is an environment where expectations for transparency and board engagement are much higher.  Also contributing is a recognition among many boards of the proxy voting power of certain institutional investors and their ability to effect governance changes (think majority voting and proxy access).

Shareholder engagement is no longer an event-driven, proxy-related process.  Boards increasingly approach shareholder engagement strategically – as an opportunity to gather constructive input, foster trust and support and dialogue on issues meaningful to the creation or protection of shareholder value.  But, this doesn’t mean boards are involved in day-to-day investor interactions – that responsibility still resides with management.  Rather, boards are exercising more oversight.  For example, boards are looking for more information about the company’s:

  • Governance team: Who is on the team?  Does it have the right set of knowledge, competencies and skills?  Can it effectively represent the board’s view?  Can it articulate the nuances of the board’s perspective vs. the company’s position where applicable?
  • Shareholder monitoring and engagement plans: Who are the company’s top investors and how has this changed or is expected to change?  In view of this, what are the top governance areas of strength or opportunity?  Are any investors (or advisors) more influential than others and should be prioritized?  What is the engagement plan and when does it makes sense for directors to engage directly? (See the post republished below for some thought starters on the latter.)

Shareholder engagement is an opportunity for companies to build better understanding, relationships and alignment with long-term, stable investors.  Forward-thinking boards are embracing this opportunity.


 

LOOK WHO’S TALKING

March 21, 2018

It’s fun to be popular.  Everyone wants to talk to you. Investors big and small with long- and short-term horizons seek opportunities to meet with and speak to company leadership.  Today, even passive investors – index funds, etc. – expect to occasionally engage with companies on relevant issues.

Now, who should do this talking?  Company management.  With, of course, investor relations leading the day-to-day.  However, it’s naïve to think Boards do not or should not talk with investors.  While I believe board-shareholder engagement should be the exception and not the rule, if done for the right reasons with the right people it can be extremely valuable.

To that end, you should have or develop a communications policy that encompasses the potential for board-shareholder engagement.  A well-crafted policy will provide a framework to guide the engagement decision given the specific circumstances and needs of the company.  Let’s start by considering what topics are best addressed by management vs. the board:

Example Management/Board Engagement Topic AllocationDirector-shareholder engagement topics

Next, consider with whom and when board-shareholder engagement makes sense.  Any decision will be a judgement call based on myriads of factors and the specific investor(s) at hand. Things to think about when deciding include the company’s strategies, results and relative performance, the nature of the investor’s issue(s), general investor opinion/perception about the matter(s) as well as the size of the investor’s holdings and influence within the investment community.

Here’s some thoughts for when it comes to the actual meeting or call:

  • Agree to an agenda upfront
  • Select directors for engagement based on board roles or prior experience
  • Prep participating directors on the issue(s), company messages and investor background
  • Provide directors a Reg FD refresher and a brief on company information in the public domain
  • Focus on active listening
  • Consider including a company representative such as the IRO or corporate secretary in meeting but allow for a private conversation for part of the time if requested
  • Capture investor feedback; ensure follow-up as necessary.

Board-shareholder engagement is an opportunity to gather constructive input and engage on issues meaningful to the creation or protection of shareholder value.  Approach the process with an open mind.


 

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

In a Clutch

In a clutch … that is being in a tense, difficult or stressful situation or crisis.  A clutch player is someone who can be counted on to perform (or outperform) in such situations.

Clutch players possess common leadership qualities[1] including:

  • Focus – It’s more than concentration, it’s knowing and staying fixed on the ultimate endgame
  • Discipline – Maintaining your center, avoiding distraction and being rooted in the fundamentals
  • Adaptability – Flexing and responding given the situation, pressure points and vulnerabilities
  • Being Present – Being in the moment and mindful of situational nuances, impacts and context
  • Constant Striving/Fear & Desire as Motivators – Complacency is the enemy of greatness and friend of the mediocre.

Why bring all this up?  Because these qualities are essential to confronting a corporate crisis … when clutch performances are required.  The good news is these qualities can be developed and programs focused on embodied, mindful or centered leadership can help.

But equally, if not more, important to navigating dynamic, chaotic crisis situations is to actually have a crisis plan, know it and practice it.  Crisis management plans need to be an integral part of a company’s enterprise risk management process and should be informed by and evolve with the company’s strategies and risk tolerances.

Now, what does a crisis management program look like?  Most experts indicate such a program should:

CompassIdentify Risks and Priorities:  Its essential to identify key operational and reputational risks, but nearly impossible to anticipate everything. So, establish guiding principles to guide the risk assessment process.  Such principles could be centered around priorities like protecting people (employees, customers and communities), preserving corporate reputation, minimizing operational disruption or preserving assets, etc.

PencilDevelop the Plan:  The crisis plan should include well-crafted decision matrices robust enough to handle an array of contingencies as well as contain escalation protocols, key communications templates and an outline of roles/responsibilities and work flow.

Team tableForm the Team:  The crisis team should encompass a variety of disciplines and expert resources (both internal and external) to guide and execute the response.  The people involved may be different depending on the type of crisis and decision matrices can help identify this.

ArrayPractice the Plan:  Practice enables crisis team members (internal and external) to build relationships and trust with each other.  Whether it’s a table-top simulation or a robust fire drill, practice will make you faster and nimbler when the need is real. It can also help identify areas where additional training, support or resources may be needed to reduce risk.

Danger signKnow How to Deploy: Work the plan. Gather information and stay focused on guiding principles.  Leverage the plan’s communication process and regularly share information as appropriate with key internal and external stakeholders.  After an event, let your guiding principles prioritize an integrated recovery plan.

Magnifying GlassReflection: After a crisis, conduct a post-mortem of root causes and what went well and what didn’t during the response. Reflect on underlying factors and take action to correct, mitigate, improve. Communicate key findings to stakeholders such as employees, customers, suppliers, communities or regulators as appropriate.

In a clutch, investor relations officers will be talking with investors nearly non-stop during a crisis.  So, think through the best ways to communicate with investors, who the key influencers are and who may need to be prioritized for outreach whether by you, your management team or board post-crisis.

Other Practical Tips for IROs:

  • Crisises aren’t always a surprise. Warning signs often abound. Develop a bullet-point outline for top of mind issues. Yes, there will be holes and you can’t anticipate everything, but it will be faster than starting from scratch.
  • Keep a key contact list with you – at home, the office, your briefcase. Even better, save a PDF copy to your phone, tablet and laptop – you’ll almost always have one of these with you.
  • Be prepared to handle a crisis remotely. Develop a process checklist or reference sheet (see sample) that contains emergency contact information and login IDs for key vendors such as your newswire service. Again, keep a copy with you and on your electronic devices.

 

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

[1] Sullivan, P., Clutch: Why Some People Excel Under Pressure and Others Don’t.

Face North

CEOs as global statesmen? CEOs as moral compasses?  That appeared to be the implication of a New York Times Deal Book article (October 16, 2018, Sorkin) about the decision of several very prominent U.S. CEOs to not attend Saudi Arabia’s Future Investment Initiative (aka Davos in the Desert) in October 2018.

All the withdrawing CEOs had important, ongoing business relationships with Saudi Arabia that a company wouldn’t normally jeopardize.  But the decision to withdraw stemmed from a decidedly non-business reason:  unresolved questions about possible Saudi government involvement in the disappearance of journalist Jamal Khoshoggi.

Now, when these decisions were made there were a lot of unknowns (there still are), but in making their decision each CEO was forced to face their true north – how to best act in accordance with their values.  Some might call this CEO activism.

Admittedly, this is may be an extreme interpretation. Some would say it’s not an example of CEO activism at all but reflects a basic moral decision.  But isn’t that what CEO activism is all about:  CEOs leading, communicating and making decisions based on a set of core values?

Today, there is vigorous debate about the theory of shareholder primacy, how to best create long-term value, the role and purpose of business in society and what is real leadership.  The fact of the matter is expectations of CEOs and their companies have changed as has the business, social and political climate in which we all operate.

The general public and institutional investors increasingly look to companies and their CEOs to take a stand on social or political issues relevant to fostering a healthy business environment according to the Edelman Trust Barometer.  At the same time, leading institutional investors like Larry Fink, Chairman & CEO of BlackRock, are encouraging managements and boards to have very fundamental and thoughtful discussions about a company’s purpose, values and cultures and to communicate such to investors.

Most CEOs (likely the vast majority) have no desire to be an activist. Still, smart CEOs choose their issues and don’t want to be caught flat-footed when the vortex of a social or political issue hurls their way.  Knowing whether and how to step in requires a deep understanding of a CEO’s and company’s purpose, values and culture. CEOs, their management teams and boards should identify their true north via disciplined analysis that:

  • Identifies relevant issues that may affect the company’s ability to serve customers, source materials, attract and motivate employees or operate effectively;
  • Evaluates the implications of an issue in view of stakeholder perceptions and potential business or reputational impact.

Based on this analysis, develop a framework to guide your approach and vet it with the board.  There are several paths available. For example:

  • When a quiet or behind the scenes approach is preferred, consider tactics such as lobbying, affiliating with appropriate trade or industry coalitions, or making targeted charitable or political contributions.
  • If visible leadership is important, think about options to weigh-in via social media, public statements or op-ed pieces. Of course, slowing or halting a planned expansion or relocating certain business activities are forceful signals of commitment that should be carefully vetted before using.

Some may say the business of business is business, but real leadership often requires something more.  If, or when, a CEO or company decides to express a view, here’s some thoughts on how to do so in a manner that supports understanding and acceptance:

  • Be Transparent: Stakeholders typically accept a company’s position if they believe a CEO or company are open and forthright and will walk the talk.
  • Be Consistent: Companies should be true to what they stand for and predictable in their actions.  Surprises weaken trust, leading stakeholders to doubt a company’s real intent.
  • Materiality: Stakeholders understand and expect CEOs and companies to take positions on issues relevant to its business, employees, customers or communities, just be transparent when expressing a perspective.
  • Leadership: By being transparent, consistent and presenting a forthright business case for its perspectives, a company will more likely be respected even if stakeholders don’t agree.

 

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

Resources:

Long Days, Short Stint

The juxtaposition of long summer days against concerns over short-termism seemed to be a key theme in summer 2018.  It started in June with the Business Roundtable urging companies to end quarterly earnings guidance.  Then in August, we had a two-fer:  Senator Elizabeth Warren (D-MA) introduced The Accountable Capitalism Act and President Trump tweeted the idea of changing from quarterly to semi-annual earnings reporting.

What all these had in common was a concern the short-termism prevalent in today’s market is detrimental to the long-term health of companies and economy overall.  And each, in their way, proposed changes or actions to counteract those forces.  I too am concerned about short-termism, but question why so many seem to think that its companies that need to change to alleviate the problem – it all about companies needing to start doing this or stop doing that.

Maybe I’m missing something, but I rarely hear suggestions on how investors or other financial market participants need to change.  Let’s face it, there’s a significant number of financial market participants who are not long-term focused – think some hedge funds as well as high frequency and risk management traders.

On any given day, these short-term focused market participants can dominate market volume thanks to easy access to information, technology that speeds decision-making and execution, and low transactions costs.  As Tim Quast of Modern IR noted, “when some machine can hammer every bid or offer and immediately cancel the order and reprice your stock 8% lower with a one-share trade. It’s absurd. We are failing to understand what the real malady of markets is – and it’s much more about structure than story.”

In my view, the majority of public companies are long-term oriented but in the competition for capital they need to deal with the reality of a market focused on quarterly results and the daily news flow.  So, what’s a company to do?  Well, don’t give up.  Many of your permanent and long-term investors want to hear about your strategies for the future.  One great idea comes from the Strategic Investor Forum which suggests companies treat quarterly earnings as “building blocks of longer-term plans and disclosure rather than the central focus.”  You can also review the 2017 Focusing Capital on the Long Term (FCLT) report for thoughts on how to shift the investor dialogue to a more long-term perspective.

While short-termism won’t go away any time soon, by consistently providing a longer-term perspective on the company’s framework for creating value and managing risk in a dynamic environment, you’ll be better positioned to earn investor patience and plan for the future.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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Just Being

Last week, I highlighted the high level of CEO turnover so far in 2018 and offered some thoughts on introducing a new CEO to the Street.  This week, I want to share some insights gleaned from research conducted by leadership advisory and consulting firm EgonZehnder to help investors relations officers become more fully aware of some of the behind the scenes dynamics of a C-Suite transition.

First, it pretty much goes without saying that new CEOs – both internal and external hires – need a acclimation period to fully understand the company’s issues and formulate a plan.  But its more than that.  You’ve probably heard the phrase “what got you here, won’t get you there.”  The knowledge and skills built over a career of “doing” (executing) is necessary, but not sufficient to “being” a CEO.

“Being” is the operative word here.  The CEO role is an intensely transformational role and in this sense the acclimation period is never truly over.  The CEO role is one that must be inhabited and embodied according to EgonZehnder’s CEO survey.  During the transition period, new CEOs need to not only gather and assess information, but also accelerate their ability to internally reflect and become more self-aware in their decisions, actions and feedback received.  It’s a process that never really ends, although CEOs get better at it over time.

This is why a less is more approach with investors is generally best in the first few months. It provides space for the new CEO to internalize some of the transformation required. However, new CEOs can be surprised at how little honest feedback they receive from the Board or senior management team, which can slow the transformation process.  Investor Relations should be sensitive to this dynamic and may be able to help.  Think of  investors who have unique or nuanced insights and with whom it may be useful for your new CEO to meet with early on (in a listen-only mode) in order to gather perspectives helpful to setting strategic priorities.

Next, new CEOs are also new to navigating board relationships.  Let’s face it:  The Board may have chosen the new CEO, but the CEO didn’t choose the board.  This can make for some interesting dynamics as the new CEO asserts their leadership and gets to know the board individually and collectively.  A focus on value creation and understanding of the investor perspective is important in aligning the board and CEO around a strategic vision.  Investor relations can play a role here as a steward of the shareholder perspective.

The EgonZehnder CEO survey also indicates new CEOs sometimes don’t realize how important communications experience and skills will be in their new role.  The need to come up to speed quickly is something investors relations can support.  IROs are typically well experienced with message and Q&A development, rehearsing presentations and media training, so they can be pivotal in providing some coaching in these areas to strengthen a CEO’s presence.

IROs spend a lot of time with CEOs.  A solid relationship is important to the success of both.  By understanding that C-Suite changes are just as much about transitions as transformations, investor relations can contribute to stronger and more impactful individuals and organizations.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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Replay: New Kid in Town

879 – that’s the number of CEO’s who have left their companies year-to-date August according to Challenger, Gray & Christmas’s monthly CEO turnover report.  This is a 15% increase versus the same prior year period, but roughly in-line with previous years.  Approximately 28% of these exits were retirements and another 10% reflect CEOs moving on for new opportunities at other companies according to the data.  Makes sense: with the economy good and labor market tight, why not exit while on top or seize new opportunities at different companies?

It’s typical to see 1,200 – 1,300 CEO exits in any given year according to the Challenger, Gray & Christmas data.  This is neither good, nor bad … its just a reality.  At some point, every company, board and investor relations officer is going to face a transition in the C-Suite – the new kid in town.  To that end, republished below is an earlier post on the topic of introducing a new CEO or CFO to the street.


New Kid in Town

February 21, 2018

 

There’s talk on the street; it sounds so familiar.
Great expectations, everybody’s watching you
                                                           New Kid in Town, Hotel California, Eagles, 1976

With the average tenure of 8 years for CEOs and 5 years for CFOs, it’s going to happen – there’ll be a new kid in town.  The new kid will need to be introduced to the street, expectations will need to be managed and everyone will be watching to see what happens.

C-suite tenure 2

Source: Korn Ferry Institute C-Suite Age & Tenure Study 2016

Of course, a lot depends on the situation.  Is it a planned transition?  What factors drove or precipitated the change? Is the new CEO or CFO an internal or external candidate?  What is their background? What are the company’s challenges or opportunities? What is investor sentiment like?  The answers to these questions will inform the introduction process.

If it was a planned transition, the business is doing well and the new leader is an internal candidate who is at least somewhat known by the street, then a “business as usual” approach may be fine.  But then again, when does that happen?

All new CEOs and CFOs – particularly external hires – need an acclimation period to understand the company’s issues and formulate a plan.  Generally, investors understand that so brief introductory calls focused on the new leader’s experience should be sufficient initially.

However, in more challenging environments or where activists are involved, investors may demand time with new leadership right away.  In such cases, it may be important for the lead independent director to make a statement or perhaps even meet with activists.  Carefully weigh the risks of having the new leader – particularly new CEOs – spend time listening to investor feedback early on. This could be beneficial for informing his/her thought process and strategic priorities.  It may also earn him/her early support if investors feel they’ve been heard.  Conversely, it can consume valuable time better spent developing a go-forward strategy.  In the end, investor sentiment should be one – but not the only – guidepost.

Throughout the initial transition, investor relations has – as always – an internal and external role. Internally, investor relations should provide the new leader a SWOT (strengths/weakness/opportunities/ threats) analysis identifying key risks from an investor perspective as well as background on sell side coverage, a profile of investor style and turnover plus a risk/opportunity assessment of top investors.  It’s also important to take the new leader’s pulse as to their experience, comfort and understanding of the investor community to optimize the new leader’s future investor interactions.

Externally, investor relations’ initial role is to highlight the new leader’s relevant experience and keep investor expectations at bay as the new leader’s strategic plans develop.  Of course, the new leader will need to engage on earnings, which may be before their strategies are fully formed.  Depending on the timing of earnings, the new leader should thoughtfully articulate key learnings, areas of focus and priorities without making premature promises or announcements.

By their third earnings calls, CFOs are often considered old hands.  However, at the same point, the typical new CEO is beginning a 2- to 3-year period filled with significant strategic moves.  Given the likely pace of change, there probably won’t be time for a formal CEO debut tour or investor day. Its important to be flexible during this time and explore different opportunities for investors to get to know the new CEO.  For example, hold webcasts in conjunction with strategic announcements to expose the CEO to investors in addition to participating in high-profile conferences and non-deal roadshows.  Once a significant portion of the change agenda is in play, consider hosting an investor day or other forum to outline the company’s transformational vision and financial targets.

When a new kid is in town, use it as an opportunity to reset the company’s narrative and investor relations priorities. Be flexible, be open and optimistic, because while the …

People you meet, they all seem to know you.
Even your old friends treat you like you’re something new.
New Kid in Town, Hotel California, Eagles, 1976


Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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Final Stretch

It’s hard to believe.  We’re in the final stretch.  The conference committee I am on is putting the final touches on content and wrapping up last minute programming details for NIRI-Chicago’s annual investor relations workshop (see link below).  Hurray!

Right now, it’s all about the process – what needs to be done to ensure a successful event.  This got me to reflecting on an essay by Dan Wang of Gavekal on the importance of process knowledge.  Process knowledge is the hard-won know-how gained from experience and the foundation for future innovation.  I’m oversimplifying here but if you don’t have practical knowledge of how things are made, materials used and what works and why, how can you identify ways to improve or imagine new uses?

While Wang’s essay is about manufacturing and engineering, his essential message is very relevant to the execution of our upcoming conference.  Yes, there’s content development and speaker recruitment – all very important – but there’s also promotion, registration, F&B service, facilities management and security.  Different people handle different aspects and each process must be managed according to its own timeline.  But everything must be integrated and understanding each part, how it works and its role is key to successful execution.  Every year, we build on this know-how in executing the workshop.

Process knowledge is important in the investor relations world.  For example, when coordinating an investor day, a site visit or even an earnings release and webcast your credibility hinges on the basic blocking and tackling activities that ensure seamless execution.  Largely this means having the proper systems and processes in place, understanding their value and how they interact.

In the IR world, creating and improving upon these systems and processes – which generally revolve around content development and logistics – requires some concentrated reflection.  For example, the content development process should include an internal vetting and review process as well as a process to execute on format decisions (i.e., slides, video, product sampling, operation tours, etc.).  As for logistics, location may dictate processes surrounding the invite/RSVP process, transportation, security and the technologies to be used (i.e., video streaming, webcasting).

Once you’ve thought all this through, build out a template with the all the processes involved.  The template can then serve as a platform for execution, enable speedy adaption as conditions change and help identify opportunities to streamline or improve the next time around.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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Thinking Ahead

How often do you see or hear of someone and wonder “What were they thinking?”, or some less gentile variation of that? Too often it seems that there was no thinking involved.

This, of course, got me to thinking … about a training session for current and future group leaders I helped lead over the summer. The purpose of my portion of this training was to demonstrate with my partners an approach these group leaders could adapt and use to teach their teams basic critical thinking skills.

Critical thinking is not negative thinking.  It’s a process of

actively and skillfully conceptualizing, applying, analyzing, synthesizing, and/or evaluating information gathered from, or generated by, observation, experience, reflection, reasoning or communication

Foundation for Critical Thinking

In other words, it’s about reflecting and evaluating information received to transform it into knowledge and understanding.

For this training session our challenge was to not get into the technical – indeed there are whole college curriculums surrounding the subject matter that we could have addressed – but rather engage participants’ “whole person” to recognize and understand key concepts and when, where and how these concepts are used in the real world.

Our demonstration integrated somatic learning and intentional questioning techniques that participants could bring back to their teams to foster critical thinking.  For example, we:

Hands iconTranslated key concepts into simple activities that participants could experience for themselves;

color celebrate iconEngaged participants in group exercises to illustrate how key concepts work in the real world;

color light iconStrategically asked open-ended, focused and integrative questions to encourage mindful reflection and evaluation.

 

This approach helped participants internalize key learnings because they were forced to think about the material more deeply than a recitation of facts and figures could achieve.  In addition, by modeling these techniques, participates came away with some tools to engage their own teams in generating better insights and decisions.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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Virtual Meeting Reality

It was inevitable.  Whether its a routine and recurring process or an opportunity to interact or engage, technology can offer a solution.  That’s exactly what’s happening with corporate annual meetings.  In July 2018, Broadridge reported that it hosted 212 virtual annual meeting in the first half 2018, up 18% from the same period in 2017.  Virtual annual meetings can reduce costs and expand shareholder access.  No wonder more companies are doing them.

Yet, this growth has some large institutions and their advisors wringing their hands that investors will lose a key opportunity to directly engage with boards and management teams if annual meetings go virtual.  I also suspect some institutions worry boards may become less accountable to shareholders if not forced to look them in the eye.

As previously discussed, I believe this is really a question of form over substance.  Annual meetings are a formality; the end of a process.  The real substance of the matter is shareholder engagement.  Managements and boards should understand investor perspectives and engage with them on issues meaningful to shareholder value.  Today, investors have many tools to engage with companies beyond the annual meeting.

Nevertheless, I believe annual meetings – live, virtual or hybrid – should be conducted in a manner respectful of investors’ position as part owner.  To that end, a committee of institutional investors, public company representatives and advisors have developed some basic principles and best practices for virtual annual meetings[1], which are generally reasonable.  virtual annual meeting 3Not surprisingly, the committee places heavy emphasis on ensuring shareholders participating virtually have the same opportunities to present proposals, ask questions or make a statement as they would at a live meeting.  The committee fairly notes this objective should be a determinant of how the meeting is conducted and what technologies are used.

I further agree with the committee that boards should thoroughly weigh the pros and cons of a virtual meeting in view of their shareholders’ sentiment toward such meetings (some have strong opinions which may affect the proxy vote), the issues to be voted upon (is it a routine meeting or are there controversial proposals) and other potential issues of concern.  Boards should explain their rationale for the meeting format and communicate formal rules of conduct for the meeting, including outlining the Q&A process such as when questions will be accepted, and the time allotted in total as well as per shareholder.

I have a more skeptical view of the committee’s suggestion that companies consider making an archived replay of the meeting available.  By their very nature virtual meetings are more accessible and snippets may go viral, potentially giving dissidents a larger platform to voice their agenda.  Given that annual meetings are a formality and no news is typically announced, why take that risk?

The reality is the use of virtual annual meetings will continue to grow.  In this brave new world, companies need to ensure the technology and format provides for a fair and equitable process, while investors need to recognize that engagement is not an annual event linked solely to the proxy.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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[1] Principles and Best Practices for Virtual Annual Shareowner Meetings, The Best Practices Committee For Shareowner Participation In Virtual Annual Meetings, May 2018

Loose Lips, Part II

Sometimes, I just don’t get it.  I’ve gone through compliance training multiple times; so have friends and colleagues.  It’s ubiquitous at public companies and is designed to educate employees, officers and the board about the company’s code of conduct, which, of course, everyone should also read.

Corporate codes of conduct encompass the legal guidelines and standards of ethical behavior expected of employees, officers and the board, and covers topics like workplace discrimination and harassment; corrupt practices; conflicts of interest; protecting confidential information and insider trading.

So, I was flabbergasted on the news that New York Congressman Chris Collins was indicted on insider trading charges.  This has absolutely nothing to do with politics, but everything do with a breach of his fiduciary responsibility to the company, his fellow directors and the company’s shareholders.

Congressman Collins sits on the board of Innate Immunotherapeutics.  This company’s code of conduct outlines its expectations about disclosure and use of information as well as insider trading. Regarding disclosure and use of information, Innate’s code of conduct states confidential information should not be used in a way which creates a personal benefit or benefits another party not entitled to make use of such information.  It further states confidential information should be kept confidential, and to ask if there is any doubt about what information is considered confidential.

Regarding insider trading, Innate’s code of conduct reminds that it’s a criminal offence to trade company shares while in possession of inside information, which is defined as information not yet publicly available but is expected to have a material effect on the company’s stock price.  The code of conduct then says this trading prohibition applies not only to employees, officers and directors but anyone else – including family and friends – who is given access to inside information.

This is pretty standard stuff.  It places no undue burden on, nor has unrealistic expectations of directors, officers or employees.  Further, the expectations outlined helps ensures those who follow it do not violate Rule 10b-5 of the SEC Act of 1934, which prohibits insider trading.

Yet, the Congressman’s loose lips tipped his son about a failed clinical drug trial before the news became public.  While the Congressman did not trade on this information, his son did and tipped his fiancé’s family, who also traded on the information.  As a director, he should have known better and should not have put his own family in such a position.

Some say insider trading is a victimless crime. That trading is essentially an exchange of information, so the very act of buying or selling is putting information (regardless of source) into the market, enhancing market efficiency.  When all trades are accompanied by a simultaneous news flash of who is trading and why, then I can accept that argument.

Insider trading is a breach of a director’s fiduciary responsibility to shareholders to keep confidential information confidential.  It’s a violation of the law, a company’s code of conduct and the trust of the company’s officers, employees and other directors.  In my view, it’s also crime against trust and the sense of fair play I believe necessary for the effective functioning of the financial markets.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

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Sources:
Frenkel, J. (2018, August 8). Insider Trading Charges Against Rep. Collins Reminiscent Of Martha Stewart Conviction. Forbes.
Frenkel, J. (2018, August 13). Collins’ Protestations of Innocence Defy Meritorious Insider Trading Laws. Forbes.