Don’t Pass(ive) The Buck

I was having coffee with a newly-minted CFO a few months ago, when he asked, “Our advisors are telling me we need to target passive investors. What do you think about that? How would we even do that?”

I had one of those “Say what?!!” moments. Target passive investors?  Either you’re in or you’re out (of an index).  But then I realized who he had been talking to and why.

So, I explained, “A company of your size and industry is going to have passive investors regardless.  This is good. They form your core shareholder base and don’t take up a lot of your time or call often.”

“However, as essentially permanent investors, they expect boards to actively represent their best interests.  That’s why they place such heavy emphasis on board composition and governance practices.”

I advised him to talk with his general counsel about implementing a governance outreach strategy. With passive investors typically owning (and voting) 25% to 35% of a public company’s outstanding shares, this is increasingly considered a best practice.

Now governance outreach does not have to be a massive undertaking (in non-crisis situations).  The first step is knowing the strengths and weaknesses of your company’s governance principles and practices.  You should also be familiar with the governance priorities of your company’s major investors – many of whom make this information publicly available.  Also, it can be helpful to review the major proxy advisory firms’ guidelines to get a broad sense of key benchmarks, but remember the largest investors have their own independent guidelines and can be influenced.

Next, during the off-season initiate brief introductory calls, establishing points of contact and understanding of investors’ approach and priorities.  Depending on tone of such calls, you can evaluate if offering certain investors meetings or calls with directors is appropriate.  Another option to consider is to ask portfolio managers or analysts at targeted firms to invite their governance contact to attend non-deal roadshow meetings with your CEO.  This is something I did with good effect when leading an outreach campaign several years ago.

Another opportunity to build relationships with governance professionals is to attend the Council of Institutional Investors (CII) conferences.  This will give you the opportunity meet with and understand investor perspectives in a more neutral environment.

These basic steps can create a strong foundation if you’re ever in need of a full-court-press on governance matters. To prioritize your efforts, evaluate your shareholder base in view of the matters at hand, your governance strengths and weaknesses, the quality of your investor relationships and the support you need, then schedule meetings accordingly.  Directors, particularly the lead independent director and relevant committee leaders, should be prepped for these discussions.

When it comes to governance outreach, don’t pass the buck.  In my view, Investor Relations is best positioned to provide context around investor perceptions and behavior and “owns” the investor relationship.  Such insights can help secure the space for boards and management teams to execute their strategies.

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

Board Binge

Have you ever spent a weekend binge watching a series on Netflix?  I wonder if that’s what it’s like to serve on the board of Netflix.  It takes a lot of time, but there’s high engagement in content.

That’s my take-away from the Stanford Closer Look Series article on Netflix’s approach to corporate governance (May 1, 2018, Larker & Tayan).  Described by Netflix founder and CEO Reed Hastings, as “extreme openness for extreme duty of care,” Netflix gives directors significant access to the company’s inner workings, more so than most companies.

To understand what makes Netflix different, it’s important to understand what’s typical.  Normally, corporate boards meet 4 – 8 times per year with directors serving on committees convening another 2 – 8 times.  To prepare for each meeting, directors receive potentially hundreds of pages of power point decks, financial data and business analysis to review about a week in advance.  There may also be ad-hoc, informal calls between and among directors and the CEO throughout the year depending on the circumstances.

In a dynamic, changing environment, is this typical approach enough?  By its actions, Netflix thinks not.  Netflix engages directors in ongoing strategic discussions by exposing them to discussions of performance and strategy on a regular basis. Netflix does this by having directors attend – as observers only – the CEO’s monthly direct report meeting (1 director attends), quarterly executive staff meetings (1 -2 directors attend) and quarterly business reviews (2 – 4 directors attend).  Further, directors are free to follow up with management after these meetings.  As a result, directors have substantially deeper knowledge of the company, its culture, depth of talent as well as its challenges, opportunities and strategies.

In addition, Netflix directors receive an in-depth, written memo quarterly containing links to additional supporting materials.  No death by Power Point here.  Directors can pose questions directly through the online portal and senior management is expected to answer.  This board memo, including director questions and comments, is shared across the executive management team so everyone is on the same page as to priorities and performance.

As a result of these practices, Netflix board meetings are very efficient.  There’s little need for presentations or performance recaps.  Instead, time is spent on dialogue and discussion. Decisions can be made sooner because of the board’s deep and current understanding of the business and its people.  As one director said: “Netflix has made two big “chasm crossings” and most companies don’t even do one. One was getting from DVD to streaming, and number two going to streaming licensing to original content. It was a huge leap, and it’s hard to imagine we could have done it without the intimate knowledge of the operations and the people.”

Can this approach work at other companies?  I can see it working in cultures where there is a high level of openness, confidence and trust in the business, strategy and each other at all levels of the organization.  I think a degree of humility is also required to truly benefit from the diverse perspectives such cultures can nurture.

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

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Supporting Role

Let’s start with the obvious: strong board dynamics and processes appear to go hand-in-hand with financial outperformance, according to a recent McKinsey & Company board study.  What piqued my interest was McKinsey’s efforts to dissect board performance across three dimensions: board processes, internal board dynamics and strength of the board’s relationship with the C-Suite.

It’s the latter I want to focus on.  In particular, how stronger interactions between CFOs and Boards can contribute to better board dynamics and how investor relations can play a pivotal supporting role.

The study indicated the board activities that most support corporate outperformance includes:

  • Assessing management’s understanding of the drivers of value creation;
  • Overseeing the development of a comprehensive strategic framework;
  • Assessing the adaption and evolution of strategy in view of the business environment, and
  • Debating strategic alternatives internally within the board itself as well as with the CEO.

CFOs add critical perspectives and insights to these processes, McKinsey contends in a supplement to the board study.  Through their interactions with the board, CFOs can provide:

  • An objective view of business results and future outlook as a whole and by business unit;
  • Context on overall and business unit performance in view of the market and industry environment;
  • Perspective on investor perceptions and their view on key value creation drivers.

By going beyond pure financial reporting to providing qualitative information about the company, its industry and markets, CFOs help inform board dialogue and increase its effectiveness.  In a way, CFOs should think of their role as helping improve board/C-Suite collaboration by identifying, surfacing and answering questions (often well in before the board meeting).

Investor Relations is primed to support the CFO in this regard.  With its finger on the pulse of investors, Investor Relations can:

  • Provide context around investor perceptions of the company, its strategies, management team and the market drivers of valuation;
  • Advance awareness of the company’s performance and strategies relative to peers and the corresponding implication for valuation multiples;
  • Offer perspectives on investor behaviors that may signal a risk for sector rotation, activism or proxy voting.

With insights such as these, Investor Relations is poised to win in the best supporting role category.

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

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