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The New Paradigm in Board-Shareholder Communications - September, 27th, 2012 - Meeting Summary

The following is a summary of the Sept. 27, 2012 presentation, “The New Paradigm in Board-Shareholder Communications,” hosted by the Philadelphia Chapter of the National Association of Corporate Directors. The presentation featured Glenn Booraem, Principal & Fund Controller for Vanguard Fund Financial Services, and Margaret M. Foran, Chief Governance Officer, Vice President and Corporate Secretary for Prudential Financial Inc. 

Most everything about corporate governance has been turned on its head in recent years.

As the global economy sputters and struggles in the face of enduring and difficult downturn, and as government regulators turn up the heat on directors and top executives, more attention is being paid to every last detail of most every company’s top-level operations.

But it’s not just the watchful eye of the government that is keeping corporate leaders on edge.

Indeed, just as regulators are more interested than ever before in the inner workings of American companies, so too are investors, who in recent years have begun to exert ever more influence over boards and executives in their ongoing efforts to shore up governance performance and ensure long-term returns. This rising power among investors—most especially institutional investors—represents a fundamental shift in the dynamics of corporate governance. It’s a shift that directors would be wise not to ignore.

That was the key takeaway message from the two experts who spoke to members of the Philadelphia Chapter of the National Association of Corporate Directors in late September. Glenn Booraem, principal and fund controller for Vanguard Fund Financial Services, and Margaret M. Foran, chief governance officer for Prudential Financial Inc., both told the directors in attendance that investors are, indeed, looking for more dialogue and more information—specifically, more easily digestible information—from the companies in which they’ve invested. They also said that companies need to be aware that investors increasingly expect that this information will be delivered to them and that such dialogue will occur; failure to accommodate their wishes or deliver key corporate messaging to key investor stakeholders, they said, could prove extremely problematic.

“I believe in proactive communication and engagement with institutional investors,” Foran said. “For many years, I was working at Pfizer, and we had many communications issues during that time. The key was all about getting your story out there—all about letting the investors know who are you before they knocked on your door. But I know it can be very difficult at times. They don’t know what you’re doing there behind those boardroom doors. I think sometimes they think we’re puffing on cigars and eating bon-bons.”

Foran was joking, of course. But the sentiment behind her statement was real. Very real.

For obvious reasons, there is a certain level of mistrust these days between the public and corporations, and that mistrust may manifest itself most fully in the relationship between top company execs and investors. Companies need to really understand this new dynamic, Foran said, because it’s a hugely important one.

“It’s really imperative that you tell that story,” she said. “It’s imperative that you tell it proactively and let people know that you have people in-house who work looking out for the shareholder and making some really hard decisions.”

One way for companies to do that, Foran said, is to communicate with their shareholders in plain English—clearly, directly, free of lawyer-speak.

Far too many companies bury important messages deep in their proxy statements, or fail to make the effort to direct shareholders and others to the most important issues related their governance. Simple things like calling out important messaging in summaries or relaying important information via info-graphics can go a long way in helping outsiders get a clearer sense of how a company operates and why it does what it does. That’s especially true these days, as proxy statements can run as along as 150 and 175 pages.

It sounds basic. And it is basic. But sometimes, Foran indicated, simplicity can prove to be very valuable.

“I support the idea of a plain English proxy statement, so people can read something and understand very clearly why you’re electing you you’re electing to what you stand for,” she says.

“I think the most important thing [about communications with investors] is context,” added Booraem, who has worked for Vanguard since 1989 and currently oversees the firm’s governance program. “What we are looking for is the connection between what the company is going and how those actions relate to the long-term value of the company. We actually have relatively few ‘bright-line’ tests.” The most time we spend in our voting and our engagement process is simply figuring out how what a company is doing fits within its industry, how it fits within the current economy and how it relates to the potential benefits of our shareholders. Really, the thing that is most important to us is having that dialogue.”

Of course, that “dialogue” takes on many different forms, Booraem said.

For Vanguard, a company with more than 3,000 companies in its portfolio, it simply isn’t possible to arrange in-depth, face-to-face meetings with the top leadership of every single one. So sometimes, Booraem and his colleagues take different steps to keep the conversation going. For instance, while he said that Vanguard will have some form of direct conversation with as many as 650 companies each year, it also recently sent out a communication to twice that many, with the simple goal of relaying their main thoughts and concerns. “We just pushed out those and they’ve driven a lot of discussion,” he said.

Toward that end, he said, it’s just as important for shareholders be open about their concerns as it is for companies to be open about their aims, processes and governance structure. And Vanguard strives to do precisely that, in part by establishing some general guidelines regarding the kinds of issues it does concern itself with—and the kinds of issues it doesn’t. 

While others may take a different approach, Booraem said Vanguard operates with the general philosophy that it is concerned mostly with the “larger” issues that most directly impact or could impact shareholder value. That means that so-called “social” issues—everything from labor practices to global warming to political activism—are items that Vanguard will rarely get involved in.

And again, Booraem said, the reason is simple: Such issues fall outside its realm of concern. At least within the context of other companies.  

“Our view is that while there are a lot of things in those proposals that we might have some degree of sympathy with from a policy standpoint, and while there may be some things that we actually agree with from a corporate standpoint, if we don’t see the connection to increasing shareholder value, we really think those things are best left within the purview of the board to determined,” he said. “So if we don’t think that [issues related to greenhouse gasses] will have an impact on the value of the investment, for example, we won’t go there.”