Board Consulting

Dodd-Frank, “say on pay,” and a number of other recent developments are all part of the inexorable shift toward greater shareholder involvement in governance matters. Couple this general trend with a low-growth economy and you have shareholders demanding loud and clear: Where is our return on investment? Your board had better be listening.

The oak-paneled boardroom walls may as well have turned to glass, as what was once a secretive inner sanctum is increasingly open to public view. Does your board have what it takes to operate effectively under the new regime, where greater shareholder input is assumed and “no comment” has gone the way of the buggy whip?

Boards need to ensure they have the new skills required to communicate effectively with a wide range of constituencies in an open environment, and in doing so they have a few choices: They can adopt a bunker mentality and resist shareholders’ demands or they can roll over and do their best to appease— neither of which seems a viable long-term strategy. Conversely, boards can take shareholders’ views into account in their decision-making and find better ways to communicate with these groups, whether they are in agreement or not.

We see the best boards listening in creative ways and carefully crafting communications plans to ensure all shareholder constituencies are acknowledged. As boards have become increasingly diverse, in every sense of the word, conversations in boardrooms have become richer and perspectives on challenges and solutions have been enhanced. Folding in the views of shareholders, who have a financial stake in the success of a company, has the potential for further enriching that dialogue.

Part of this process will entail an attitude adjustment on the part of many directors, from viewing shareholders as activists to be avoided to one that recognizes the interests and influence of shareholders as partners to be engaged. By turning the “problem” of activist shareholders on its head, boards can begin to recognize that the real issue is likely one of perception, where it is the resistance of directors to adapt to a different era of governance—one where shareholders require more information and desire greater influence—that is the real stumbling block.

Here are a few suggestions for boards, given the new transparency in the boardroom:

• No nostalgia allowed—Embrace, adapt, and communicate. Be ready to engage rather than run and hide from communications challenges. Recognize that increased transparency and the need for ongoing dialogue, with all relevant constituencies, are here to stay and that no amount of wishing will make the good old days come back.
  
  
• Anticipate concerns and be prepared—A low-growth economy combined with more vocal and demanding shareholders is a dicey mix. When a board decides to invest in growth rather than pay dividends or engage in stock buybacks, it should be ready to persuade shareholders of the wisdom of its approach. Similarly, when it comes to executive pay, the board can’t just let the numbers do the talking. But while shareholder input is now a given, as fiduciaries, directors must decide what is in the best interest of the company.
  
  
• Threat versus opportunity—For every weak board that feels threatened and retreats from engaging and communicating more openly, there is a strong board that understands the opportunity and the rewards. Those who view new proxy rules, for example, as a chance to explain—whether about board leadership or hot-button issues such as CEO compensation— rather than obfuscate, will emerge as leaders.
  
  
• Identify the gaps—There will continue to be a premium on communications skills, in addition to all the other skills required in a good director. The best way to determine whether you have the board you need—a proposition that changes as frequently as conditions in the business environment and corporate strategies change—is to undertake a periodic, third-party assessment of the board. This objectivity is key to an effective assessment process, since it is virtually impossible for a board to accurately identify its own weaknesses.

Instead of avoiding or fearing shareholders who demand a voice in corporate governance, directors must adjust to the new transparency. That doesn’t mean shareholders get to ride roughshod over directors, but it does mean boards must actively listen and respond to shareholders, as well as more proactively convey their own narrative of what actions they are taking and why they are in the interest of investors. Under the new regime, communications must be a high priority.

Most important, boards should talk to their shareholders before their shareholders talk to them.

This article was first published on Boardmember.com and is republished on this website with kind permission of the magazine.