An open exchange of views

Corporate governance seems to pervade everything a company does these days. Corporate secretaries, investor relations teams, board members and senior management spend a significant portion of their time trying to figure out what their major investors are looking for and how they might vote come proxy season.

Following an extremely active and somewhat controversial proxy season, the need for greater communication, not just between boards and shareholders but all the stakeholders in the corporate environment, has become even more obvious. By gaining better insight into what investors are concerned about, and finding a way to address those concerns, it is likely that expensive proxy fights can be avoided.

Putting on a show

Companies are going to great lengths to ‘get in front of’ shareholders. Pfizer, for example, has been widely lauded for hosting an in-person roundtable for representatives from 35 of its largest shareholders. Everyone who attended that meeting went away praising the power of open and candid communication.

But hosting such an event requires a lot of planning and more than a few resources. A lot of companies are looking for alternative ways to get their story out to the shareholding public and other avenues for investors to provide feedback on particular issues.

In June a new communication environment came into being that allows major stakeholders to communicate directly with one another. Launched by RiskMetrics, parent company of ISS Governance Services, the new Governance Exchange is an online environment that allows participants to openly and securely share opinions, policy and thought leadership on the latest governance practices.

Rich Leggett, head of RiskMetrics’ governance and accounting units, explains: ‘From our perspective we launched the Governance Exchange recognizing that there was a need in the marketplace to bring together, in a community fashion, institutional investors, directors of companies and corporate executives, and to provide them with a forum for dialogue on corporate governance issues.’

Although the service is still in its infancy, it has already attracted around 240 members. Jill Lyons, head of the Exchange, explains that 60 percent of members are institutional investors and the rest are mostly company management and directors. There are a handful of academics and other governance specialists who are also involved. Membership is open only to clients of RiskMetrics. For institutional clients it is included in the general services while there is an additional fee for corporate clients.

Leggett says, ‘We could not be happier with the 240 members considering we only officially launched this back in June. It has been a really positive start for us.’

One of those members is Jacob Williams, senior corporate governance analyst at Florida’s State Board of Administration (SBA). The SBA was one of the very early participants in the Exchange. ‘We feel it is important to be engaged in collaborative programs that help to advance the cause of governance,’ says Williams. He joined the Exchange with the intention of gaining better insight into the perspectives of board members, and compensation committee members in particular. And he’s happy with the results. ‘So far we feel like our involvement has been beneficial.’

Understanding the internal processes and thoughts of directors is important for shareholders who want to know what is really happening at companies in which they invest.

Listen, and be listened to

Mark Michael, a director at Natus Medical and Nollenberger Capital Partners, and former corporate secretary at 3Com, is also a member of the Exchange. ‘The Governance Exchange, although early in its development, is off to a great start,’ he says. ‘It has great potential for directors, shareholders and management to exchange data and ideas. Effective communication underpins good governance.’

While Williams is looking for insight into the corporate boardroom, Michael is looking to feel out investor opinion on specific topics. ‘There is a broad range of topics that get discussed on the Exchange but one that I have dealt with personally is succession planning. Many shareholders view this as an indicator for the effectiveness of other parts of the overall governance program so it is important to have them understand what is happening, and for me to understand what they are thinking,’ he says.

One of the most important things as a board director, or member of senior management for that matter, is to ensure that institutional investors are happy. ‘The Governance Exchange is a powerful resource allowing us to take the pulse of shareholders and activists,’ notes Michael. ‘This will have significant benefits for companies not just during proxy season but throughout the year and will help ensure many issues are addressed without the need for proxy campaigns.’  Williams also believes that communication facilitated by the Exchange can lead to better relations between shareholders and companies and thus a reduction in the number of shareholder proposals and proxy fights.

‘The program is still in its infancy but I believe it has a lot of potential in terms of increasing the general level of communication between stakeholders and allowing more constructive input,’ Williams says.

‘In particular, public company directors have been able to make postings and offer more in-depth explanation for their decisions and provide candid information about particular circumstances. This serves two important purposes: it proves to us that directors are actively involved in decisions and [that they are] fulfilling their oversight duties. More than anything we want to know that directors are actively engaged, and [the Exchange] gives us a more complete picture of what is happening, thus allowing us to make a more informed decision,’ counsels Williams.

He also likes the fact that apart from being able to see the opinions of companies the SBA is interested in, he can post his own thoughts on various issues. ‘Apart from having the opportunity to gather the opinion of others we also post our perspectives on the Exchange. These mostly involve our opinions relating to transparency and disclosure but do occasionally branch out into other areas as well,’ he says.

Saying the right thing

This is something that Leggett says RiskMetrics was very conscious of when setting up the Exchange. ‘We really want to put it out there that we are the enabler behind the community but that this is not just our views. This is a facility that is a sharing of thought leadership across a range of constituencies and perspectives.’

From a governance perspective the Exchange is trying to foster a better communication thruway from shareholders to board/management. Leggett suggests, ‘If you look at all of the key issues that investors are struggling with at the moment – ‘say on pay’, equal access, majority voting and so on – these are problems that require the groups to come together and find solutions. At the same time we are adding value to our clients by helping them to gain access to resources on the issues they are worried about.’

While the Exchange is enjoying a successful beginning, not everyone sees the value. One corporate secretary from a Fortune 100 company who requested not to be named feels that ‘this is probably just going to be another case of the choir singing to the converted.’ This is because only paying clients of RiskMetrics are allowed access to the website, which he believes means that ‘most people have already bought into their ideas.’

Another area of concern among some people, both members and non-members, is the sensitive and conservative nature of corporate participants. One corporate secretary who is not a member of the Exchange asks, ‘Will anybody really be prepared to put their name to something that is in the least bit controversial or against the mainstream attitudes?’

Even some participants within the Exchange recognize this as a potential problem. Michael, a regular user of the service, says, ‘One of the biggest hurdles to the success of a service like this is the nature of the participants. Many in-house participants are lawyers (or former lawyers) and are therefore very cautious about making any sort of comment or identifying themselves, even in a quasi-public environment such as what exists on the Governance Exchange.’

This is an issue that Leggett is particularly sensitive to. ‘This is an important point. While we have worked hard to create an environment that allows people to identify themselves, I am very aware of the reluctance of many members to openly identify themselves. They are cautious people by nature but we are hoping that the more people become familiar with and start to trust the product, the less of a problem this will become.’

The disclosure issue

Disclosing material information or anything that could be considered the type of information that might impact share price in this sort of environment could be particularly problematic being that it is not a public forum and therefore some investors would be getting information before others. As management and boards become more comfortable with what they can and can’t say, it is possible that their reservations about speaking publicly will subside somewhat.

There is also some concern that disclosing certain opinions that may be counter to those that are promoted by ISS might have an impact on the rating a company receives. Lyons explains that the discussion on the website is treated confidentially and does not get used for other parts of the business like the Corporate Governance Quotient (CGQ score): ‘To the extent that the content makes everyone who is a member smarter about governance topics and perspectives, it is informing the debate and is a very effective way to do primary research but there is no direct tie-in to policy formation or ratings products.’

Leggett also believes that the Exchange will help to promote the general standing of RiskMetrics and help to break down some ‘out-of-date’ attitudes toward the company. There has been in the past, and in some cases there still is today, a certain level of dissatisfaction and distrust towards ISS/RiskMetrics. ‘This could be an important tool in breaking down some of the barriers and the mistrust that people have toward us,’ hopes Leggett. ‘We are very much trying to show people that we are a transparent organization which is open to a broad range of perspectives on governance and compliance.

We talk about three things a lot in terms of themes for our company and they are transparency, access and expertise. And to some extent the Governance Exchange embodies all three of those. We want to be transparent and provide all this data, research and information, and as part of that members have access to lots of experts and different perspectives, and in addition there is this concept of expertise.’

Michael underscores the idea that various contributors could optimize the type of communication that occurs on the Exchange: ‘I believe that there is a value in the Governance Exchange for all stakeholders – management, boards, shareholders and others. Including the views of other independent experts such as lawyers and academics helps to round out the range of opinions and should provide greater clarity.’