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Sarbanes Oxley : Governance : Thought Leader

Board-Shareholder Communication is Next Frontier in Governance

Ira Millstein
Visiting Professor in Competitive Enterprise and Strategy
Yale School of Management

As companies brace for clashes with shareowners over executive pay at 2008 annual meetings, pioneering boards are reducing tensions by opening direct channels of dialogue between directors and investors according to a new policy briefing by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

“Talking Governance: Board-Shareowner Communications on Executive Compensation” finds:

Sustained, two-way dialogue between directors and shareowners on executive compensation and other governance topics is so far “rare in the U.S.”

“There is no insurmountable legal obstacle to board-shareowner dialogue on executive pay or governance.” Research shows evidence that Regulation Fair Disclosure (Reg FD), a rule passed by the SEC to prevent selective disclosure of information, is not a barrier to communication between directors and investors on executive pay policies and other governance matters. “Reg FD is a caution, not a barricade,” write the report’s authors.

However, companies motivated to engage in dialogue with their investors have had to commission legal counsel for guidance on communicating within the constraints of Reg FD. The report proposes that the SEC develop a market-wide safe harbor for board-shareowner communications on corporate governance issues to help save corporates unnecessary legal fees and reduce the risk of sanction under Reg FD.

“Investor and corporate officials identify concrete and significant advantages from board-shareowner communications.”

“Without processes for open board-shareowner dialogue, public markets may face unnecessary costs and burdens.” The authors add:

“Hostility between parties can saddle investors and public company boards with burdensome costs and risks, including the possibility of the share price not reflecting the full value potential of the company over time.”

“The new capital markets virtually demand un-circling the wagons and opening up communications between boards and management with shareholders,” said Ira M. Millstein, senior associate dean for corporate governance at Yale, in parallel remarks to the ALI-ABA conference on February 21, 2008. “I see communication between boards and management with shareholders as the alternative to hostile interactions, additional mandated disclosures or other hurried regulation, and litigation.”

“Talking Governance” is co-authored by Stephen Davis, project director of the Millstein Center, and Stephen Alogna, senior manager of Deloitte & Touche LLP Corporate Governance Services and visiting research fellow at the Center. It is undertaken in cooperation with the Working Group on the Advisory Vote on Pay, an ad hoc body of corporate officials and institutional investors. The paper follows from the Center’s June 2007 policy briefing on Britain’s requirement that investors vote annually on their confidence in a corporation’s compensation practices. “Say on pay” was found to have had a material positive impact on spurring dialogue between directors and institutional investors.

The release represents initial findings of a six-month study exploring board-shareowner communication through interviews with U.S. directors, corporate managers, institutional and retail investors, professional advisors and governance professionals. The report provides an analysis of the views and practices of these constituents related to the constraints, risks, benefits, and commitments in engaging in a sustained dialogue on governance issues.

Although there are currently no common best practices for board-shareowner communications on governance and executive pay, the report outlines methods of interaction that companies are experimenting with, ranging from open shareowner meetings with unfettered access to the board to one-off responses to shareowner inquiries.

The executive summary and initial findings of the “Talking Governance” report are available online; the full report, including UK research, will be published in June 2008.

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