It looks like investors and board members are finally learning to play nice with one another, given the growing number of companies that are engaging with shareholder activists.

“Efforts by shareholders and boards to improve communications have been ongoing for some time,” but have accelerated in recent years, says Holly Gregory, partner with Weil, Gotshal & Manges LLP.

Last October, for example, Pfizer kicked off a planned series of meetings between its board and institutional investors on corporate governance matters. UnitedHealth Group, too, in the wake of a major stock option backdating scandal, has created a nominating advisory committee that will enable shareholders to recommend directors, although it is not binding.

And in June 2007, a group of companies and investors released the so-called Aspen Principles, which pledge goodwill among management, labor, and investors. Several dozen subscribers included PepsiCo, Xerox, CalPERS, and TIAA-CREF.

In return, companies have noted increased success in meetings with institutional investors on governance matters compared to prior years. According to Risk Metrics, shareholders withdrew 300 of 1,145 resolutions filed in 2007 (26.2 percent) up from 189 of 947 (19.9 percent) withdrawn in 2006.


Experts say several factors are fueling the improved relations between directors and investors. “Over the past couple of years, proxy access, majority voting, and say on pay have led to more calls for interaction between large block shareholders and management,” notes Peter Gleason, managing director and chief financial officer of the National Association of Corporate Directors (NACD).

Stephen Davis, fellow at the Millstein Center for Governance and Performance (and a Compliance Week columnist), notes that, while say on pay has fueled much more robust communication in nations like the United Kingdom, Australia, and the Netherlands, where the practice currently takes place, it’s also gaining steam here in the United States. As previously reported by Compliance Week, companies received a boost in July, when the Delaware Supreme Court in CA v. AFSCME said that software giant CA could indeed exclude a shareholder proposal on reimbursement for proxy fights from this year’s proxy statement.

“Over the past couple of years, proxy access, majority voting, and say on pay have led to more calls for interaction between large block shareholders and management.”

— Peter Gleason,

Managing Director & CFO,


In the same breath, however, the court also explained in its ruling when such resolutions can be included in the proxy statement, leaving the door open for shareholders who want to propose future bylaw amendments.


Davis also notes that executive pay is not the only issue top-of-mind for shareholders; Other concerns include issues about board structure and strategy, director nominations, and whether to have an independent chair, he says.

In recent years, too, a number of companies have met with groups of investors who specialize in socially conscious issues. For example, JP Morgan Chase, Merrill Lynch, Citigroup, T. Rowe Price, and Morgan Stanley agreed to meet with a coalition of human rights organizations and socially responsible investment companies to discuss how the financial giants could use their leverage in Sudan to demand an end to the conflict in the African nation.

Improved Communication

Meanwhile, a number of groups have been studying the relationship between board members and shareholders with the goal to boost communication and strengthen the relationship between the two groups.

Such an aim has become particularly important in light of Regulation Fair Disclosure, which prohibits a company from disclosing material information about the business selectively.


Findings of the Yale School of Management study on shareholder and board interaction (for more detailed information, please click on the study link below):

1. Sustained, two-way dialogue between boards and shareholders is rare in the United States.

2. There is no insurmountable legal obstacle to boards and

shareowners engaging in constructive dialogue on governance matters, including executive pay policies.

3. Regulators would likely find broad support for an initiative

to develop a market-wide safe harbor for board-shareowner


4. Investor and corporate officials identify concrete and significant advantages from board-shareowner communications that, they assert, outweigh potential risks and costs of dialogue.

5. Companies have commented on the benefit of boards acting as

a “listening post” even if simply to hear shareholder concerns.

Constructive director-shareowner dialogue on governance

hinges for both investing institutions and corporate boards

on three features: high-level commitment, resources and informed strategies.

6. Compulsion, through crisis or other acute events, is the

foundation under most current U.S. corporate initiatives to

foster governance dialogues with institutional owners.

7. There are no common best practices for board-shareowner

communications on governance and executive pay. Companies and investors continue to experiment with various methods of interaction.

8. Without processes for open board-shareowner dialogue,

public markets may face unnecessary costs and burdens.

9. Companies currently tend to focus board-shareowner

communication efforts on larger institutional investors despite

developments which suggest the potential rising influence

of retail investors.

10. An institutional investor may be best equipped to assume

the role of effective interlocutor when there is coherence between the portfolio management and governance functions of the organization.

11. UK companies see the advisory vote on pay as having catalyzed dialogue with shareowners. Boards commonly integrate such dialogue into an annual process framed to produce corporate remuneration policy and the board compensation report. Nascent U.S. practice, by contrast, is based on ‘vote first, consult later.’


Yale School of Management (2008).

According to a policy briefing by the Millstein Center for Corporate Governance and Performance at the Yale School of Management, “Reg FD was not intended to prohibit boards and investors from engaging in private dialogue, rather it was created to promote fair and balanced communications to all share­holders.”

The issue is likely to receive a lot of attention on Oct. 19, when the NACD’s blue ribbon committee is expected to publish a highly anticipated report, laying out a framework for how boards and shareholders should communicate with one another. The report will encourage boards to state what topics are up for discussion, how the boards will respond to shareholder requests for meetings or dialogue, and who boards will talk to and under what circumstances.

Because “what works for one company doesn’t work for another company,” the report will not tell boards how to execute the policy, says Gleason, stressing that his group represents companies ranging from micro caps to the largest organizations.

But the report will offer baseline recommendations that will include, among other things, that all directors attend annual meetings, make board communication a priority, and disclose why a specific director was chosen for the board. The NACD report also will recommend that companies respond appropriately and timely to shareholder concerns and that directors accompany management on road trips to visit investors.

The NACD is not the only group working on such recommendations. In mid-September, The Conference Board Working Group on Hedge Fund Activism also released its final recommendations for improving communication between companies and hedge funds.


And Gregory, meanwhile, is chairing a task force of the corporate governance committee of the business law section of the American Bar Association, whose aim is to look at the delineation of the roles and responsibilities between shareholders and directors to determine potential implications from a legal standpoint. For example, if a company agrees to a say-on-pay advisory vote, does this change the fiduciary liability and legal exposure of the board members if they are subsequently sued over a pay matter? “This issue hasn’t gotten much attention,” she says.

Of course, talk is cheap if it doesn’t amount to anything substantive, and whether anything will change as a result of increased communication is still up for debate. “My guess is smarter companies are going to realize the need to move swiftly,” says Davis. “If they don’t want intrusive rules, companies must act in advance and make a good case that they are fixing the problem.”