As we begin 2012, corporate leaders are facing the European debt crisis, gridlock in Washington, activist shareholders increasing influence over boards, and the public’s continued suspicion of corporate motives.
Determining how investor relations and governance officers can help their board and C-suite thrive and succeed in a year that presents both challenges and opportunities, was the focus of a panel at NYSE Euronext’s NYSEfacts program. TK Kerstetter, president of Corporate Board Member; Jeffrey D. Morgan, CEO of the National Investor Relations Institute; and Kenneth Bertsch, CEO of the Society for Corporate Secretaries and Governance Professionals shared their outlook.
TK believes that the public’s suspicion of corporate motives is a result of some clear miscues by company boards, specifically related to the financial crisis, which was played up by dramatic media headlines painting all corporate board members as “greedy and asleep at the switch”. While such cases did and do exist, the general board population has been painted with this broard brush even though most boards are diligent about their duties. The hard work to change public opinion is just beginning. How can the C-suite and boards win back the respect of shareholders and the public?
Jeff Morgan believes that rebuilding the public’s perception of corporate leadership and integrity will be one of the biggest board challenges in 2012. Whether through legislation - Dodd-Frank – or civil unrest - Occupy Wall Street, the public has laid an ample portion of the blame for the economic recession, massive job loss and financial meltdown squarely at the feet of corporate leadership.
Jeff recommends a two-step approach including consistent communication and engagement with shareholders, and ensuring that the corporate culture embodies good corporate governance. The latter refers to “boards of directors and senior management setting a tone at the top and providing compliance and ethics programs with the necessary resources, independence, standing, and authority to be effective”. Good governance emanates from the inside out. “Leading companies are not only those that steadily increase profits but also maintain the highest standards of integrity”.
Manage Your Message
Ken Bertsch views shareholder engagement as one of the biggest challenges in the coming years. "I might be biased because I come from the investor side, but the big challenge is figuring out more productive ways of meaningful interaction with investors”.
“I think there is are challenges in director voting, and with making “say on pay” a useful vehicle for consideration of shareholder views, and not a driver to lowest common denominator,” says Bertsch. “Shareholders have gained more authority and more power through voting mechanisms, so the interactions with investors have become more important than ever”.
Recognize that the proxy statement is an important investor communications vehicle, not just a compliance document, says Bertsch. More important, with issues such as “say on pay” and “say on frequency” now on the agenda, confused readers can easily become disgruntled voters. “You need to give the explanation in a precise and attractive way so that people read it and understand what you are saying.”
Another hot topic relates to board communication and allowing certain board members to speak directly to investors. “There is great risk enabling investors to speak to investors, especially if the questioning ventures outside a corporate director’s expertise”, says TK Kerstetter. “You don’t look good answering incorrectly or ducking the question so be careful with this growing request from shareholder and investor groups.” But Ken Bertsch suggested that greater interactions with investors are a reality for many companies, and consideration should be given to ensuring that one or more board members has skills in such communication.
Panelists discussed the proposal by some investors for a “Fifth Analyst Call” focused on governance. Jeff Morgan is not an enthusiastic supporter of the initiative and referenced Wachtel Lipton’s advisory on the “Fifth Analyst Call”. “Governance discussions are important,” Jeff believes “and governance issues should be incorporated in year round discussions with investors.” By way of background, in late 2010, a group of institutional investors, led by Walden Asset Management, suggested that companies host an annual conference call specifically for institutional investors to focus on corporate governance discussions in the proxy statement. Walden suggested inclusion of the independent board chairman or lead independent director in the call. Wachtel Lipton discourages companies from agreeing to the request for a number of reasons including, the “significant burden preparation and participation” the call places on the director but most important, the “disclosures in the proxy statement should adequately cover all that this director could say about the corporate governance topics at issue”.
The Proxy Vote – Investors’ Are Taking Action
Over a number of years, some institutions (large asset managers in particular) have moved away from a “check the box’ approach to governance, said Bertsch, who indicated that some fundamental investors are doing more to involve portfolio managers in proxy voting decisions, with fewer relying solely on compliance personnel. Moreover, he said, even big indexers, such as BlackRock Investment Management, have over time expanded and strengthened staff focused on proxy voting, in an attempt to have sufficient industry and company-specific knowledge to move beyond mere box-ticking. While not all investors are improving their game in this regard, said Bertsch, issuers should recognize that many institutions are receptive to outreach on proxy voting, and open to learning about governance and the real life of boards of directors.
Into the Future
What are the attributes that will separate the average board from one that sets the standard for excellence n 2012? The mandate may come from the non-executive chairman, lead director or CEO. But as TK notes, “buy-in from the CEO is critical because he or she can be the gatekeeper of access, but in the end, the secret to great boards is leadership regardless where it comes from.” Jeff added that “your company’s investor relations officer sits in a sweet spot to help the board and company executives on these matters, communicating to and also listening to investors and potential investors”. This information can be vital to the board and executives to know how the “street” is evaluating your company.
Ken Bertsch views executive compensation, a perennial hot button, as probably the top proxy voting topic next year. According to ISS’s annual policy survey, 60 percent of investors and 61 percent of companies identified executive compensation as a priority issue. Companies may have to make changes to their compensation plans as a result of last year’s say-on-pay vote. The focus on pay disparity between the CEO and rank and file will put additional pressure on boards to defend pay models.
Jeff believes that with the U.S. economy slowly improving, corporate boards will be under pressure from investors to put their wealth to work. But should they try to grow their existing businesses, invest in new ones, buy competitors, boost dividends, or repurchase shares? Jeff sees 2012 as potential for increased mergers and acquisition activity. “Having a lot of cash is good problem to have and we are seeing historic opportunities for well-managed companies”.
 ISS 2011-2012 Policy Survey Summary of Results (Sept. 2011), available at