SDX Protocol: Be Patient
In a July 2, 2014, letter, The Shareholder-Director Exchange and a group of leading institutional investors wrote to the chairmen and lead directors of over 1,000 large U.S. public companies urging them to endorse the SDX Protocol for shareholder-director engagement and to develop policies consistent with the Protocol. The letter has received a fair level of attention, with a widely circulated article in the New York Times as well as numerous blog posts. Our clients have asked how they should respond, if at all.
Shareholder-director engagement has been a topic of increasing interest over the past ten years. The migration to independent chairmen and lead directors is, in part, an outgrowth of this topic. Earlier this year The Conference Board issued its own recommendations and guidelines regarding shareholder-director engagement. It is a topic of great interest, and in due course most major companies will need to address it.
Troutman’s view is that shareholder-director engagement generally is good. Shareholders have every right to communicate with the individuals that they elected to oversee a company, and directors benefit from learning the concerns of shareholders. But we do not endorse either the SDX Protocol or The Conference Board’s proposed guidelines in their entireties.
Our experience is that directors, particularly directors of large companies, often suffer from board fatigue. The time necessary to prepare and participate in the board process can be significant, particularly for a director who is committed to staying abreast of key issues or serves on several active board committees. While directors often are well paid, for most directors, time, not money, is more scarce, and any increase in time commitment has to be well-justified.
Shareholder-director engagement is time consuming. Although directors may be aware of the general topic of discussion in advance – for example, compensation, succession planning or expense control – they typically are not aware of the specific questions that will be asked by shareholders. And while some shareholders are just looking for a friendly ear, others arrive intending to ask detailed questions and receive some level of meaningful response. As a result, even active and knowledgeable directors have to prepare for the meetings – or risk looking like a klutz. Good preparation takes time, both from directors and from management.
We believe that the best approach is to:
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Ask shareholders to meet first with management.
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If they want to meet with directors after that meeting, ask that they identify the specific topics that they would like to discuss so that the meeting can be attended by the appropriate director(s).
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Try to schedule the meetings immediately following an earnings announcement so that the Regulation FD risks are minimized.
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Meet in person only with large shareholders, e.g., shareholders owning in excess of 1% of the company’s shares or at least a significant dollar amount, such as $25 million.
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Arrange group meetings once or twice each year if smaller shareholders want to meet.
This approach is not as generous or complex as the others that have been suggested, but we believe this approach is reasonable and not inconsistent with the positions of either SDX or The Conference Board.
A related issue is whether directors, or management on their behalf, should reach out to shareholders on their own initiative. The SDX Protocol guidelines encourage this, but our experience has not been positive. Some shareholders will agree to meet, but others, often institutional shareholders for which a meeting would make sense, will not, and it is not clear that meetings are in most instances much more than a courtesy. Until this practice is better established, we do not think that most companies will benefit from initiating director-shareholder engagement.
The question remains as to how companies should respond to the SDX letter. We recommend that they:
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Do not need to formally respond. It was a widely distributed, impersonal letter and SDX is not expecting a response.
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Make it clear in their proxy and other materials that the company supports director-shareholder engagement and identify the contact person for shareholders to initiate those engagements.
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Monitor developments in this area over the next few years and, if supported by a trend among larger companies, adopt shareholder-director engagement guidelines. In the absence of a trend, we do not believe this effort is cost-justified and it adds very little to the invitation to engage that should be contained in the proxy statement.
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Confer with directors with respect to their willingness to participate and begin to identify directors who comfortably could discuss likely topics. Unfortunately, we expect the burden of this process to be imposed upon a small subset of directors who, because of their expertise, will host all of the meetings.
But above all, we are urging clients to be patient and see how practices in this important area evolve.
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