Why do companies make this so complicated?

The past few weeks have yielded no fewer than three new proposals for “shareholder engagement”, from

Pricewaterhouse Coopers (PwC), the Shareholder-Director Exchange (SDX), and The Conference Board (TCB). We’ve read every word of all three, including the 76 page(!) white paper from TCB. We also considered this subject ourselves years ago.

All three disappoint us to varying degrees. Despite appearing to care deeply about investor views, they all represent a kind of triumph of corporate indifference and insularity. We know this because none of them urge BoDs to ask us investors what we really want out of our portfolio companies, and then listen closely to our answers. Each has their own quirks and flaws, as well.

PwC: Just Useless

From the first page, even:

1. Direct dialogue between shareholders and a director may not be appropriate for all companies...
   

No sane investor would think this, although BoDs do.

It gets worse. PwC identifies the authors of the guidelines, which includes attorneys from Weil, Gotshal, so the thinking originates with two prominent corporate cheerleaders. But, besides a couple of vague surveys of directors and investors, it draws conclusions from a total of eight unidentified interviews, only three with investors. So, it should surprise no one that PwC advises:

1. With rare exception, a director should never meet alone with a shareholder. Someone else—most commonly inside or outside counsel—should attend.
   

The rest of it has similar advice to protect BoDs from us.

SDX: Curious Provenance

The SDX “protocol” has received the most attention in the media. It sets forth ten guidelines for mediating communication between companies and shareholders. These ten, though, serve more like any conventional guide to effective internal team meetings (identify topics, select participants) rather than a framework for candid discussion of the company’s business. They do have some decent ideas about criteria for deciding which investors to engage (Protocol 2, p. 12).

We find the four sponsors more interesting than the relatively harmless guidelines:

1. ❖Cadwallader (noted BoD attorney)
   

2. ❖Broadridge (pro-company administrator that makes a proxy plumbing reform necessary)
   

3. ❖Tapestry Networks (C-suite networking group)
   

4. ❖Teneo (well-connected corporate lobbyist).
   

It’s as corporate-friendly a group as we’ve seen. To their credit, the SDX sponsors did convene a working group that includes several senior people from the investor community, although it includes only one PM or CIO.

TCB: A Confusing Mess

This one actually starts with a good question:

1. What is the optimal balance in the relative roles of management, directors, and investors in the governance of public corporations?
   

We’ve asked this ourselves. It doesn’t happen to address constructive engagement between investors and companies, but it’s interesting anyway.

It goes downhill from there. Among 1) extensive task force recommendations, 2) numerous guidelines for engagement, and  3) a lengthy white paper, we can discern a jumbled range of empty directives and random comments, none of which answer or really even consider engagement, or the other question that they pose. Instead, they advise accounting for “all stakeholders”, “enhancing trust”, and other vacuous platitudes. Or, when they do approach engagement, they come up with investor-hostile gems:

1. Direct engagement between directors and institutional investors can be beneficial in special circumstances, but it should not be a routine method of engagement for most US companies and investors.
   

They also lob in stuff having little to do with improving communication between BoDs and investors: further proxy advisor regulation, less company disclosure, and proxy voting reforms that favor corporations.

The TCB task force also includes many corp gov luminaries, but only two professional investors, and only one of them an active PM.

Two Very Telling Details

Between the SDX and TCB versions (as noted, the PwC one is useless), a couple of details reveal the true nature of these efforts: to defend companies against inquisitive shareholders.

First, both take care to enumerate the benefits to investors of improved engagement. TCB lists six such benefits (p. 10 of the Guidelines), while SDX lists four (p. 5-6 of the Protocol). SDX also lists acceptable subjects for discussion between investors and management (Protocol 2, p. 12), and excludes the best stuff:

1. ...[I]t is inappropriate for shareholder-director engagement to include discussion of general business operations, current and projected financial results, strategic execution, and other operational and performance issues for which company management is directly responsible.
   

TCB and SDX really just help BoDs tell the company’s official story, and allow investors to comment on corp gov. Glaringly absent is any mention of influencing the company’s strategy, operations, risk-taking, balance sheet, or anything else remotely related to preserving or enhancing the value of the investment.

Second, both set forth elaborate ways to set agendas, determine who participates, assure regulatory compliance, and otherwise insulate the BoD from any controversy. At no point do these guidelines advise the BoD actively solicit input from shareholders about the company. We have in mind directors asking questions of investors like this:

1. ❖What do you think of our strategy, operations, and financial structure?
   

2. ❖What growth and risk-taking do you want from the company?
   

3. ❖What do you want the BoD to do?
   

Instead, both mostly help companies deflect investors, while appearing to care. If they did care, they would encourage BoDs to engage directly, frequently, and substantively with investors, without escort.

How Really to Engage with Shareholders

This could be so simple it fits a few items on one page:

1. 1.BoDs and investors should communicate frequently, with management present if both so choose.
   

2. 2.BoDs should inquire about investor views and preferences for the company, including basic strategy, growth rate, risk preference, balance sheet structure, corp gov, and exec comp.
   

3. 3.BoDs can talk about anything, except confidential personnel matters, trade secrets, and material non-public information.
   

4. 4.BoDs must abide by Regulation FD, and communicate with all investors fairly.
   

5. 5.BoDs can decide with whom to communicate, and how long and frequently. They can delegate contact to executives and IR, or decline to talk to investors. They do so at the risk of losing the next BoD election.
   

But, then it wouldn’t require extensive task forces and white papers, and expensive memberships and advisors. It also exposes BoDs to uncomfortable situations. Still, that’s why we elect them, and pay them all that money.