Listen before you leap

Investor relations departments are manning the frontlines at companies struggling to restore the bond they once had with their investors. At Foley & Lardner’s National Directors Institute, the ‘Investor and shareholder relations in the current economic climate’ panel described how to achieve a sense of harmony and understanding between a company and its shareholders.

Looking at the impact of the crisis on investor relations and the new issues related to activist shareholders can help companies revive. One hotly debated issue is the value of regular earnings guidance. ‘If it is at all possible, even considering any lack of visibility there is in one’s business, one should drop guidance as a last resort,’ explained Foley partner John Wilson, adding that investors can’t fully assess companies throughout the year without periodic guidance. ‘Just because there isn’t short-term visibility doesn’t mean there aren’t long-term goals a company is shooting for.’ Therefore, Wilson reasoned, there are areas in which companies can provide guidance, confiding that ‘providing assumptions is really key.’

John Palmer, co-founder of PL Capital, said companies are generally being increasingly communicative. ‘The dialogue has changed,’ he said, mentioning that board members have been more willing to meet with him recently. ‘Companies are now seeking our input. It’s one of the few times when boards are asking us whether they have the right CEO.’

Other questions focus on stock buybacks, TARP and the sale of companies, Palmer said. Having previously been considered an activist shareholder, he now much prefers being considered a business partner.

In spite of increased communication, shareholders are demanding more change. ‘We’re going to run more proxy contests this coming season than we have over the last five years combined because we think there hasn’t been much accountability on the boards of directors,’ said Palmer. His firm will also run proposals for majority voting and declassified boards as this is a year for corporate reform, he maintained. As for who shareholders want to talk to, Palmer said it’s the CEO, the CFO or someone ‘who has the ability to make a decision’ and communicate that to the board.

Richard Grubaugh, senior vice president of DF King, agreed that proxy season will be trying this year, noting the prevalence of shareholder proposals at large companies concentrating on say on pay, TARP and pay-for-performance issues. Unlike previous years where retail shareholders tended to side with management, Grubaugh said ‘all bets are off’ for 2009.

Compensation as well as withhold and against recommendations for specific director elections are proving the major issues. ‘Majority voting hasn’t really been tested to the level it will be for this coming proxy season,’ Grubaugh said, predicting that some directors will not be reelected. On top of that, companies must deal with negative recommendations from proxy advisers.

Hunker down
It’s important to deal with all your shareholders in a similar fashion as it can be very difficult to tell an activist from a non-activist, cautioned Jeffrey Brown, senior corporate counsel at Motorola. He suggested that companies have a ‘point person’ to ‘ensure the message is consistent.’ This individual must also know to which board member shareholder queries should be directed. He also emphasized the necessity ‘to understand the profile of your company.’ When briefing the board, along with the annual review focusing on takeover defenses, information on what makes the company unattractive or attractive should include shareholder base and cash status.

Some initial measures that companies can take to fortify themselves against  any potential shareholder activism, suggested Gordon McCoun, vice chair of FD International, are self-analyzing to determine vulnerabilities by critically evaluating corporate governance, maintaining active and open communications and responding to inquiries.

‘When it has been identified that there is a real situation, your board should be advised immediately,’ said Brown. He discouraged ignoring activists, but noted that in terms of board interaction, it’s case-specific,  acknowledging that ‘it would be extremely rare for an initial meeting [with a shareholder] to be with a member of the board.’ From his own experiences with one of the more notorious activists - Carl Icahn - Brown said it’s necessary to have a team in place that has been identified beforehand. The team should engage an investment banker and proxy solicitor with whom you work closely at the outset to identify the significance of the threat and determine a risk mitigation strategy. The team must meet regularly and be quick to assemble.

Brown believes the company should meet with the activist, beginning with the IR team and then the CFO. Management must also be involved in conversations the shareholder has with the board, PR and corporate communications, as proxy fights often play out in the public eye.

‘The first thing companies need to do is understand the threat of the proposal,’ advised Grubaugh, underscoring the fact that for some shareholders, proposal-making is a hobby. These vote projections can weigh into how much effort should be put into negotiating it off the ballot.

In conclusion, Palmer helped dissipate the fear companies attach to shareholder activism by expressing desires common to shareholders and companies alike: ‘All we need is a company to be well run, well structured and to have the right management team in place.’

Grounding his optimistic view from the corporate side, Brown, who has dealt with many an activist, added: ‘A lot of times these folks just want the company to do well.’