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How To Think About Shareholder Communication

Must Directors Follow Company Policy on Shareholder Communication? by The Activist Investor

Investors and companies settle proxy contests for BoD seats, and investors win BoD seats in proxy contests, with satisfying frequency. Now, PMs and their director nominees find themselves on portfolio company BoDs more than ever.

That first BoD meeting features a routine orientation. Outside counsel delivers a standard lesson on fiduciary duty and a thick binder with company and BoD policies and procedures. How much of this stuff does a new director really need to know?

Less than you might think. We can learn the basics of fiduciary duties of care and loyalty in an hour. The policy manual exists mostly to entrench CEOs and directors, so we skim it, then shelve it.

BoD policies cover all sorts of arcane detail:

BoD meetings
Committee structure
Outside directorships
Equity ownership
Term limits
Meeting attendance
Communication with shareholders.

We care most about shareholder communication. After all, we landed on the BoD to represent shareholders. We want to learn what shareholders want from their investment, hear their questions about the company, and convey to them, within some limits, how the company plans to deliver.

Alas, for almost all companies, BoD policy requires directors to direct all communication with shareholders through the CEO. The company publishes contact information only for IR. If a shareholder somehow gets in touch with a director, then that director must refer the inquiry to IR. Heaven forbid contact with a journalist!

Companies claim to protect directors this way. They leave communication to the IR pros, and insulate directors from trivial shareholder complaints. They also use the pretense of avoiding Reg FD violations. Realistically, this barrier allows CEOs to filter shareholder sentiment, and tell the BoD only what the CEO wants directors to hear.

This is nonsense. Any PM or executive good enough to join a BoD has the skills to talk to shareholders. How, then, does a new director get around the silly policies that require the CEO to handle all investor communications?

It depends on whether you gained the BoD seat through an election or a settlement. If through an election, then you can safely ignore all BoD policies, including ones on shareholder communication. If through a settlement, it depends on the terms of the settlement agreement.

Winning a BoD election is nice. The company really can’t do anything to you, even for wanton and willful disregard of most BoD policies. The other directors will shun you, of course. The Nominating Committee won’t pick you again, but you knew that. Shareholders remain the only ones who can remove you, at the next shareholder meeting.

If you join a BoD through a settlement of a proxy contest, or perhaps to avoid a proxy contest, you may face more limits. In this situation, in exchange for the BoD seat, the investor and director typically agree to a range of requirements, such as on buying or selling shares or on supporting other activist investors.

One typical provision, then, requires any appointed director to comply with all company policies. Failure to do this (or to comply with any other requirement in the agreement) can lead to the company demanding your resignation. Smart companies obtain the resignation letter at the time you sign the agreement, and enforce it as needed.

A smart director, then, negotiates these provisions carefully. Shareholders probably expect access to a director they helped (or pushed) onto the BoD. Some settlement agreement allow that director to communicate with the one shareholder that nominated him or her. A shrewd director will seek the latitude to communicate with all shareholders.

We’ve covered the substance of shareholder communication before. You can’t disclose employment matters, trade secrets, or material non-public information. This leaves room for many other interesting subjects, including broad strategy, business results, and BoD process and internal affairs.

Ideally, you win election to the BoD, and can represent shareholders diligently, communicating with them freely and using your best judgment. Even within the confines of a settlement agreement, you can seek the same freedom.