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Pre-emptive communication can help companies deal more effectively with restive shareholders.
Sarah Johnson, CFO Magazine
June 1, 2011
After a decade of conceding on various shareholder demands (majority voting, annual director elections, expanded disclosures) and nearly one year after the Dodd-Frank Act gave investors a say on pay, companies are rethinking how they communicate with shareholders — and whether they should do it more often.
"Every public company is trying to figure out the right way to communicate and engage with shareholders, at the proper frequency and at the proper level," says Ellen Richstone, a former CFO of several companies, including Sonus Networks, who served as the financial expert on American Power Conversion's board.
Dodd-Frank's requirement that shareholders get a regular — albeit nonbinding — vote on executive pay packages has added to the sense of empowerment that shareholders have gained in recent years, say corporate-governance experts. Indeed, half of the companies surveyed in a recent Institutional Shareholder Services study said their engagements with investors have increased in the past year.
Adding to companies' eagerness to converse is the law's pending proxy-access provision, which will give shareholders the right to nominate directors. Although the rule is tied up in a court battle between regulators and business groups, "companies are acting as if it has happened," says Bill Coffin, CEO of CCG Investor Relations.
And they're paying more attention to what investors want. "Companies have been trying to get input from shareholders [up front] instead of afterward," notes Peggy Foran, Prudential Financial's chief governance officer. The fear of reputational damage is one motivator: companies worry that a no vote on pay packages will result in bad publicity and derivative lawsuits.
To date, that risk has been minimal. As of early May, only 13 companies received failed pay votes (among them were Hewlett-Packard and Jacobs Engineering). Most companies have sought to preemptively "explain why they've paid the way they have, and as a result they're getting positive votes for it," says Peter Gleason, CFO of the National Association of Corporate Directors.
However, some companies did have a rough time of it this past proxy season. About 30 companies publicly battled proxy advisory firms that urged shareholders to vote against executive-compensation plans, according to law firm Latham & Watkins.
Determining the best way to communicate is no simple feat. In a controversial move, Occidental Petroleum, which saw its compensation plan voted down last year, touched base with investors ahead of its annual meeting by holding a call between some directors and institutional investors. So far, this type of discussion (known as a Fifth Analyst Call) is rare, and critics question whether such calls put companies at risk of violating Regulation FD, the fair-disclosure rule.
Robert Hayward, a partner at Kirkland & Ellis, suggests that companies approach their interaction with investors as a yearlong affair rather than as an annual chore come proxy season. "Always know who your top shareholders are, who's coming in, who's going away, what their policies are, and how that will affect what you do," he says.
Companies won't lack for motivation: another Dodd-Frank provision gave investors the right to request how often they want to vote on say on pay, and most investors have asked for annual votes.