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How to Perfectly Align Boards and Shareholders

About 20% of big firms disclosed a shareholder engagement program in 2012, by 2016 the number grew to 66%. However, 7% of these firms disclosed engagement with proxy advisory firms, which recommend proxy voting decisions for institutional shareholders. Investor campaign by activists grew by 61% within 2010 and 2015 while assets under management (AUM) at activist funds increased by about $150 billion during this period. Before Dodd-Frank, Say on Pay and corporate governance scrutiny came into play, public boards were viewed to operate in an investor controlled environment.
Among the subjects examined at the last Equilar Board Leadership Forum in Dallas were activist activity and shareholder engagement. Issues like director pay, risk strategy, and Corporate M&A best practices were also looked into. Participants included investors, executives, and board members who converged to deliberate on the gap between the boards of directors in public organizations and stakeholders of companies in a changing governance environment.
Corporate Transactions and Risk Strategy
Despite lags in the IPO market in the past years, the environment for corporate M&A remains blooming. Although firms of a same size merge, the acquisition of smaller companies remains one of the strategic and innovative ways large firms grow. The first 90 days unfolds the play of the won or lost synergies, hence discipline must be in place right from the onset. Alignment of management’s incentive compensation agreements and after deal retention goals with executives was also advised.
Board Composition and Compensation
Two of the most prevalent corporate governance problems boards will and are facing in 2017 are succession planning and board composition. Institutional investors are advocating for thorough inquiry of board diversity citing their concerns with the current situation of board composition. In March, two firms (BlackRock and State Street Global Advisors) both with AUM running in trillions addressed board diversity in the preparation of their annual meetings.
It is essential to find new directors with the right skills to meet the organization’s long-term objective; however, this implies that new directors may have non-traditional backgrounds. Professionals in regulatory compliance and technology may require coaching from experienced directors to grasp the intricacies of the boardroom.
Payment for directors can serve as an incentive for boards. As advised by a governance advisor, stipulating requirements for equity holding up until retirement may assist in preventing turnover problems which may come up when some directors need to hand over to new members.
While discussing the way forward, a director rejected the idea of management being excluded from meetings between management and investors. According to another director even if maintaining a positive relationship between management teams and analysts is the aim of investors, they should be able to discuss explicitly when they need thorough clarification on any ambiguity.