Engaging with shareholders and not fall foul of disclosure rules.

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By Felix Marks – Felix.Marks@EthicalBoardroom.com

The nature and frequency of engagement between shareholders and board members is changing. These changes are creating and are likely to continue creating a number of potential challenges and complexities for all involved parties. For example, it is still unclear as to how to determine whether an engagement has been a success or not. In the past directors have hesitated to step into the spotlight and engage actively with company shareholders. However, this is not a useful strategy in the current climate where shareholders, in particular institutional investors, are demanding an increasing amount of engagement. There are a number of challenges for improving board to shareholder engagement – in particular with regards to companies not straying from the restrictions and stipulations of disclosure rules and regulations. A major risk to increasing the frequency of shareholder engagement is the potential violation of Regulation Fair Disclosure (Regulation FD). The concern regarding this regulation is that private and individual meetings with groups of institutional investors or shareholders could lead to information being revealed to selected parties that has been undisclosed to other market participants. There is a risk that directors may share previously undisclosed information in these meetings with shareholders and this information must, to be in accordance with the regulations, be shared in a public disclosure in a suitable and timely manner. Directors are hesitant to deal with this risk as it can be complicated to monitor and manage. Furthermore, the cost of breaching this Regulation FD can be substantial and in the end will very likely outweigh the benefit of improved shareholder engagement for the enterprise.

Several institutional investors have however stated their belief, publicly, that Regulation FD is not a valid excuse or reason for companies to refrain from proper and improved engagement. They have suggested that directors need to operate in a well-informed manner with proper awareness of what information can and cannot be disclosed to outside parties. To address concerns that some companies might be using the regulation to avoid engagement, the SEC has clarified in a 2010 compliance and disclosure interpretation that Regulation FD does not prohibit directors from speaking privately with a shareholder or groups of investors.

Companies furthermore need to be careful not to communicate inconsistent messages between various parties and meetings. One method of increasing engagement is through setting up more frequent meetings involving different investors. However, this kind of meeting activity may potentially lead to inconsistent messages and information being shared between the various parties. It is crucially important that the same information is passed between relevant parties and this information is within the relevant rules and regulations.

Investor meetings outside of the annual meeting are increasing in number and are being set up as part of improving engagement between the two parties. However, the extra meetings have a differing dynamic and are more like two-way dialogues and discussions rather than the typical scripted agenda that is presented in the annual meeting. Therefore, it is very likely that a range of different questions and responses will be discussed – and it is difficult to know in advance what regulatory lines these discussions may potentially cross in advance. Furthermore, with the individual meetings it will be, and has been, difficult to ensure that the same message is disseminated on every occasion that any given board member sits down with each group of different shareholders. Somehow the board must come up with a plan and strategy to determine how to share consistent messages and responses while not overly restricting the two-way conversation for which purpose the meeting was set up for in the first place.

Board directors in general have shown a belief that a successful engagement may potentially be completed within under a week. Investors, on the other hand are not convinced on the success of the engagement in these terms – simply having the conversation is not enough for them, they are more focused on reaching an understanding. Shareholders are more concerned about whether the engagement properly provided an appropriate and full opportunity for board members and shareholder representatives to reach a mutual understanding and consensus on company issues.

Reaching a consensus is of paramount importance to investors and in this case it is more likely that a successful engagement will take at least a month of dialogue between the two parties. Overall, shareholders are indicating that they are interested in a larger amount of interaction while directors are more focused on shorter meetings and discussions.

A further challenge of increased engagement will be a potential disconnection between internal parties of a company – for example between directors or between directors and management.  Directors will be tasked with providing company executives with the proper amount of detail regarding the discussions of shareholder engagement. Furthermore, if the concerns shared are not discussed fully with the other members of the board, the potential benefits of engagement may be diminished.