Board-Shareholder Communications

Foreword to the 2014 Edition

Boards and Shareholders: Setting Priorities Together

Few priorities are more urgent for boards today than communications with their shareholders. The need for engagement, however, is not a recent addition to leading governance issues. NACD has worked for better communications between directors and investors since its foundation. The first issue of the association’s newsletter (in December 1977), foresaw more shareholder involvement in director nominations and emphasized the need for board “self-regulation” to maintain good shareholder relations.

In 2008, NACD issued the Key Agreed Principles to Improve Corporate Governance for U.S. Publicly Held Companies, the outgrowth of dialogue with the Business Roundtable and various institutional investor groups. One of the principles took its theme directly from this report: “Governance structures and practices should be designed to encourage communication with shareholders.” NACD has included investor perspectives in our Fortune 500 Advisory Councils, roundtables, educational programming, and Board Leadership Conferences. A significant milestone was the 2008 Report of the NACD Blue Ribbon Commission on Board-Shareholder Communications. This report exemplified and advanced board-shareholder dialogue by looking at the “why, when, what, who, and how.”

This 2014 edition of this report reissues that guidance in light of a new era for board-shareholder communications—one setting common priorities.

A Changing Regulatory Environment

In the six years since our 2008 report, shareholders have increased their potential for impact on the boardroom—on a wider range of issues and through a broader array of channels. Among many other developments, highlights of the last several years include:

• In February 2010, the Securities and Exchange Commission (SEC) adopted rules requiring enhanced and additional proxy disclosures. This has resulted in more disclosures on compensation policies and practices that “present material risks to the company,” stock and option awards, qualifications of board members and nominees, reasons for board leadership structure (combined versus separate CEO and chair roles), the board’s role in risk oversight, and potential conficts of interest of compensation consultants serving the board. In addition, the SEC eliminated discretionary voting by brokers.
• In July 2010, the SEC put out for comment a major review of the proxy voting system also known as “proxy plumbing,” as well as proxy advisor independence. The suggested reforms are still currently under discussion.
• Also in July 2010 was the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as “Dodd-Frank.” This law mandated many rules afecting the boardroom, including a shareholder advisory vote on executive compensation (“say on pay”), and expanded disclosures on areas such as director qualifcations, the link between compensation and risk taking, and compensation committee independence.  As of July 2014 more rules on compensation-related disclosures lie ahead, including the ratio of median employee pay to CEO pay (proposed and pending), and pay for performance (not yet proposed).
• Dodd-Frank afrmed the SEC’s right to pass rules on proxy access, which it did in 2009. The SEC’s two rules on the topic were met with a legal challenge, however. One survived—a revision to requirements for proxy resolutions that now allows shareholders to propose bylaw amendments permitting proxy access.
• In April 2012 the Jumpstart Our Business Startups (JOBS) Act established a new category of issuer—the emerging growth company—and relaxed requirements for these companies when communicating with qualifed investors prior to a new offering. 

All these developments have put many more issues before the board, largely at shareholders’ behest. Now more than ever, it is critical that companies and boards prioritize those issues through dialogue.

The New Need to Prioritize

Shareholder engagement need not always be face to face—an impossible goal for investors with broad holdings. Communication can take place through multiple channels and forums. As this report notes in the following pages:

• “Boards know why they approved management’s strategy, and shareholders know why they chose to invest in the company. Communicating on these points may be mutually beneficial.”
• “While management and the board typically develop corporate strategy, candid communications with knowledgeable shareholders may serve to enhance that strategy. For example, an investor with special insight into general social trends not yet identifed in the 10-K may alert a board to risk factors that could threaten management’s strategy. Directors who meet with such shareholders will increase their understanding of the risks faced by a corporation.”
• “The single most important duty of the board is selecting, monitoring, evaluating, compensating, and—if necessary—replacing the CEO and other senior executives and ensuring management succession. Shareholders want assurance that boards are taking an active role in this critical area.”

Although our first Blue Ribbon Commission report on this topic made these observations more than a half decade ago, they bear reemphasis in the new environment of greater disclosure. Remembering them can help directors and shareholders alike focus on what matters and avoid the distractions of outliers and outworn issues.  

This new edition includes a thorough revision of all supporting resources appearing in the endnotes and appendices as well as a “refreshing” of the language of the report where needed. Readers will encounter references to the latest empirical studies, legal analyses, and corporate templates as well.

Clearly, to keep a focus on the big picture, it is important for boards and shareholders to engage in an open, ongoing exchange of perspectives. We have both participated in such meetings over the years, including this NACD Blue Ribbon Commission on Board-Shareholder Communications. We trust that this updated edition of our report will empower that ability going forward. 

Dennis R. Beresford and Richard H. Koppes

2014 Co-Chairs