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.



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
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
Lead-IR Advisors, Inc.

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Passive Resistance

Much has been made about the growth of passive investing.  Today, passive investments (index and exchange traded funds) represent approximately 37% of all assets under management in the U.S. up from 19% in 2009.

Pundits have raised several broad economic and social concerns about this growth, including:

  • Its effect on stock prices and corporate valuation;
  • The implications of the significant cross-ownership levels of passive investors on economic competitiveness, income equality, innovation and corporate investment in research & development;
  • Demand for the IPO of small companies that may not automatically become part of an index.

These are big questions that I’ll let market analysts, economists and philosophers tackle.  Instead, I want to address the implications of the growth in passive investing for investor relations professionals.

First, there is the potential impact on trading and valuation.  On any given day, its estimated index funds, quant funds and ETFs represent about a third of a typical stock’s daily trading volume. It’s also estimated another third of daily volume is generated by automated or high frequency trading.  So, combined, 65% – 70% of a typical stock’s daily volume is driven by programs, bots and algos – not company fundamentals – thereby increasing the correlation between and among individual stocks in a sector as well as with the overall market.

It also means fewer active or fundamental investors are setting price.  As a result, their investment decisions are potentially more impactful given so much of trading can be driven by non-company-specific factors.  Communicating your investment thesis, understanding active investors’ underlying styles and building relationships becomes more important.

Questions to ask:  What does your investor base look like?  What is the mix of growth, GARP, value or momentum investors, etc. and their investment horizons?  If existing investors exited your stock, who is poised to move in? What’s important to attracting these investors? Would a sector rotation change your outreach strategies?

Second, consider the implications of passive investors being your permanent owners.  They focus on both the quality of board and governance practices as well as how the company conducts its business (encompassing operating, environmental and social matters). This reflects their view that strong board oversight is the best way to protect and enhance their investment. Passive investors want communications that articulate and put context around a business’s long-term strategic framework and seek evidence the board is engaged and performing its fiduciary responsibilities.

While passive investors rarely initiate, they do hold boards accountable by actively evaluating issues raised by other investors and their internal and external proxy advisors. Their vote is critical as they often own between 25% – 35% of a typical public company’s outstanding shares.

So be familiar with the strengths and weaknesses of your company’s governance principles and practices.  Understand the governance priorities of your passive investors and the nuances of their views and voting record.  Consider conducting periodic outreach to stay abreast of their perspectives and build relationships before you need them.  Share your learnings with your board.

Wrapping up, don’t be passive about passive investors.  They will continue to play an important function in the markets for the foreseeable future.

  • Understand the behaviors of both your active and passive investors.
  • Develop a comprehensive approach to investor outreach.
  • Be cognizant of the implications for trading and valuation.
  • Think about the strategic importance of passive investors during an activist campaign as well as on matters related to environmental and social issues.
  • Balance your communications to address near-term expectations and results with your long-term strategic framework and corporate purpose as you reach out to all investor audiences.

 Lisa Ciota
Lead-IR Advisors, Inc.

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