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.

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.

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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