David W. Anderson shares his views on the importance of the dialogue between shareholders and the board of directors. Published in ICSA Governance & Compliance, UK
David W. Anderson shares his views on the importance of the dialogue between shareholders and the board of directors. Published in ICSA Governance & Compliance, UK
David W. Anderson shares his views on the importance of the dialogue between shareholders and the board of directors. Published in ICSA Governance & Compliance, UK
Point of no return? David W Anderson, President, The Anderson Governance Group
For years, pressure has been building among
shareholders for deeper, more meaningful dialogue with their boards. With their capital at very evident risk, they desire greater influence over corporate decision-making and, more significantly, more direct control over the composition of the board itself. Regulators in the UK have obliged, putting a stronger provision for dialogue into the new Code, reinforcing the expectation that true accountability will be found in the hands of owners. US legislators have come to the same conclusion, writing into the Dodd-Frank Act a requirement for public companies to hold non-binding advisory votes on executive remuneration (say on pay) at least every three years and giving the US Securities and Exchange Commission (SEC) expanded power to create simpler, more cost-effective means for shareholders to nominate directors (access to the proxy). US investors are now catching up with their UK cousins. It remains to be seen if shareholders will seize the opportunity provided by these regulatory and legislative advances. Merely putting the right tools in shareholders hands is not enough. Directors and shareholders have to be willing to engage with each other. It seems that the perspectives of directors and investors on both sides of the Atlantic are becoming more in line with each other. More importantly, both parties know they are in a critical period where their role and relative power in the system of corporate leadership is being defined by the actions they take. Thus UK and US directors are grappling with a fundamental question: how to embrace shareholder involvement in order to benefit from shareholder perspectives without courting interference, sowing confusion or diminishing their power to govern effectively? Directors realise that shareholders want to influence corporate decisions and express concern over their loss of relative corporate power. They argue that business decisions made further away from the reality of that business may make firms less competitive. In contrast, shareholders see the risk theyve already experienced in lost enterprise value due to poor decision-making, in which they were not involved. Boards in Canada are responding to these pressures by adopting merit-based director nominations, making their board composition 18 www.charteredsecretary.net
strategies more sophisticated and looking to more
diverse pools of talent. In disclosure documents and direct meetings with key shareholders, they are giving an explicit description of what they are looking for in directors, how expectations have evolved and what is being done to keep directors up-to-speed in the business. These boards are earning the respect of shareholders. The new UK Code puts the onus for effective shareholder dialogue squarely on the shoulders of the board chair. Certainly, an independent board chair ought to take the lead, however, there is a wider opportunity here. In Canada, the governance/nominating committee and its
Boards need to understand shareholder
interests, objectives and concerns. chair may play a vital role. It can identify upcoming relevant issues and explain those issues to the board. It can recommend appropriate strategies for shareholder engagement, make better director nominations and devise director development with a mind to creating a board that functions well and knows how to interact with shareholders. Boards need to understand shareholder interests, objectives and concerns in order to adequately assess the opportunities and risks facing the business. The board chair, along with the governance/nominating committee, should develop a shareholder engagement philosophy, provide directors with necessary training and coordinate shareholder dialogue with management. With input from shareholders, the governance/ nominating committee may put forward talented and credible directors to shareholders, demonstrating in the process respect for shareholder perspectives. The actions of legislators and regulators, combined with the growing expectations of shareholders and a deepening sense of accountability on the part of directors is bringing about a realignment of power in corporate leadership. The status quo is no longer an option. It remains to be seen if this new regime will produce the results it has been created to achieve.
ABOUT THE AUTHOR
David Anderson MBA PhD ICD.D is the President of The Anderson Governance Group based in Toronto. He can be reached at david.anderson@taggra.com and +1 (416) 815 1212.