Tuesday, October 21, 2008


This is a big week for corporate governance folks as the NACD is having a meeting in Washington, D.C. centered on the issue.

Top concerns for public company boards are:
  • Strategic planning and oversight;
  • Corporate performance and valuation
  • CEO succession
Shareholder relations, according to the NACD, has been ranked for the first time as a "critical area." In fact, it has always been THE critical area, but boards were unaware of it or they defaulted to management to take care of shareholder relations.
Now, there is a worrisome trend towards tasking boards of directors to add shareholder relations to their burgeoning to-do list. Devolving shareholder relations to the board of directors in the ways being discussed in governance circles is a mistake.
Shareholder relations, aka investor relations, should be a fundamental responsibility of the executive management team, headed by the CEO and the CFO. The first principle at work is to keep a function at a level that is as close as possible to the customer. In this case, analysts--both buy and sell side--portfolio managers, financial media and other capital market participants look to the executive team as responsible for generating results from their current or prospective investments. These are the folks who are grilled on the conference calls, and this is the way it should be. Add to this mix, retail brokers, message board manipulators, hedge funds and their proxies, and you have a combustible brew. SEC counsel and corporate counsel are actively involved in working through issues of disclosure with the management team on a daily basis.
Why would an outside director be injected into this process? The vast majority of corporate directors have no experience with the workings of equity capital markets, and they are not up-to-date with real time changes in the business outlook or prospects. Add to this the complexities added to shareholder communications by Regulation FD and the idea of an information mosaic, to which they might unwittingly contribute, and you have unnecessary risk placed on directors.
As a rule, the most fundamentally-oriented, long-term equity investors do not want, or require, large bandwidth for communicating with their portfolio companies. They are too busy managing their portfolios, staff, money flows and marketing. An individual company's shares may only be 1% of their portfolio. They also do not inadvertently want to be brought over the wall by being given inside information, whence they are unable to trade.
All companies need to be open to their shareholders, and if a communication needs to be established with the board of directors for a specific, limited purpose, then that process needs to be acknowledged, managed and documented through the mechanism of the ongoing shareholder relations program. The board of directors needs to be informed about the shareholder relations program and regularly review components like disclosures and management presentations. Directors should periodically attend management presentations at investor conferences in order to get a flavor of the market communications.
If a company becomes a target of an activist hedge fund, then the process becomes different, but the principles are the same.
Oversight of shareholder relations is part of a board's normal function, but it should not become part of the board's charter. In this way, the customer gets what they need, without undue burden and risk being placed on the board of directors, which already has a full plate.

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