Activist stampede pushes board directors into shareholders' arms
November 8, 2015
Activist stampede pushes board directors into shareholders' arms
NEW YORK - A few days after joining the board of Atlantic Power, private equity veteran Gilbert Palter said he got a flurry of calls from the energy company's top shareholders, who wanted more than just to wish him well.
"They wanted to hear my perspective on the company. And they wanted to bend my ear with their own thoughts," said Palter, co-founder of EdgeStone Capital Partners in Toronto. He said he's mindful of not speaking for the company but rather as a member of the board.
The rising power of activist shareholders has added a new responsibility to the role of board director at a publicly traded company: investor relations.
From JPMorgan Chase & Co to Microsoft, and Johnson & Johnson to Apache Corp., board directors across North America have increasingly begun serving as a bridge between institutional investors and corporate management teams.
In the role, which barely existed at most companies five years ago, board members must be careful to avoid sharing inside information or to interfere with a CEO's own communication with investors.
Director engagement with investors is an evolving trend, though it's developed to the point where board members are now embarking on "corporate governance road shows" in the autumn, to gauge investors' views and to ensure their support at the annual meeting in the spring.
"Most directors do not go out willy-nilly and speak to shareholders," said Wendy Lane, who serves on the board of insurance company Willis Group and investment research firm MSCI Inc. "However, I have become friendly with institutional investors, and when I see them, I pick their brains about what they’re thinking about in terms of the companies I serve."
Director engagement is yet another sign of how activist hedge funds, equipped with more than $150 billion of spending power, have changed the dynamic inside executive suites - a dynamic that is now intensely focussed on preparing against attacks by dissident shareholders.
The trend also underscores the increasing value and complexity behind the role of board director, which has evolved from attending a few meetings per year to being a hands-on ambassador, schooled in corporate governance issues, pay structures and shareholder views.
Of the S&P 100, 65 companies disclosed specific shareholder outreach initiatives in their most recent proxy statements, compared to 8 in 2010, according to executive compensation data firm Equilar.
The disconnect between management teams and investors was laid bare when companies starting receiving poor scores regarding executive compensation from mutual and index funds after the 2008 financial crisis. That was followed by a wave of activist campaigns and proxy fights that overthrew boards and re-jiggered balance sheets, thanks in large part to support from big institutional investors.
JPMorgan's lead independent director, former ExxonMobil CEO Lee Raymond, oversees the board's shareholder engagement initiative, which in 2014 included around 90 calls and meetings on governance and compensation topics with shareholders representing around 40 percent of the company's shares, its proxy statement says.
Healthcare company Johnson & Johnson barely passed its 2012 "say on pay" vote on executive compensation. Shortly after, the company's compensation committee chair was among those who went directly to shareholders for feedback, proxy statements show. Two years later, after changes were made, the plan earned 96 percent shareholder support.
After failing its say on pay vote in 2013, feedback from investors helped oil and gas company Apache Corp. pass the test the next year, also with 96 percent support, Apache lead director Charles Pitman said in this year's proxy statement.
For Microsoft, one way the company connects its board with investors is through video. Dating back to 2009, the company has posted an annual video interview with a member of its board. In a May blog entry on the company's website, Microsoft's deputy general counsel, John Seethoff, spelled out the board's investor outreach policy and included a seasonal flow chart which showed a specific plan to have directors speak with shareholders in the summer and fall.
"With the increase in shareholder activism, one effect of this kind of director engagement is the ability to get a feel for nascent shareholder unhappiness," said Richard Grossman, a partner at Skadden, Arps. "Are they unhappy with the direction of the company...or with capital allocation? It’s a way for board members to get direct and unfiltered views from shareholders."
The threat of shareholder activism, combined with a board's increasing accountability to investors, new pay regulations and a host of other factors has added to the complexity of the director role, said Equilar director Dan Marcec.
That complexity has made the role more specialised, more demanding, and, as a result, higher paying, he said. The median annual retainer for lead directors at S&P 500 companies rose 17.8 percent to $267,000 in 2014. For all directors in the index, median pay rose 16.8 percent in the 2010-14 period to $233,600, Equilar data show.
The dialogue between a board member and investor can be tricky, as U.S. securities law restricts what a director can share. As a result, investor relations officials are careful to walk directors through formal training on what can be said.
"A lot of management teams are reluctant to let management teams interface with shareholders," said Gordon Pridham, who currently serves on six boards, including waste handling company Newalta Corp.
"We would never send a director out on their own, without somebody from management participating in the exercise," he said, speaking on a panel last month at the Activist Investing in Canada conference in Toronto. Pridham said the most natural fit between the board and shareholders is for the chair of the compensation committee to speak to investors about the company's philosophy behind the executive pay plan.
"If the first time we're hearing from a company in our role as shareowners is when the company is under siege by activists, that's not good," Vanguard CEO William McNab said at a director conference in May.
McNab advised directors to form shareholder relations committees and to adopt initiatives proposed by the Shareholder-Director Exchange, a working group of directors, institutional investors and advisory firms that formed last year to encourage more dialogue on corporate governance matters - even if the conversations do tiptoe closely to insider restrictions.
Data from PWC's annual corporate director survey show directors, in spite of the sensitivities, getting more comfortable with the chats. Two-thirds of directors surveyed think it's appropriate to discuss corporate strategy with investors, up from 45 percent in 2013, PWC says.
"Companies individually have to decide how to best manage that risk, but it shouldn't be by shutting out the shareholders completely," McNab said. -Reuters
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