Will the new “Shareholder – Director Exchange” (SDX) improve the engagement process or create more problems

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By Derick Hughes – Derick.Hughes@EthicalBoardroom.com

The dynamic between boards and shareholders of the companies they represent is evolving at a fast pace. This dynamic is now presenting a new set of challenges and these require new tools and techniques in the boardroom. The relationship between boards and shareholders has had to be rethought with a view towards identifying the differences in shareholder and board member perspectives in a timely and appropriate manner.

A new initiative has been set up to specifically address these concerns and challenges – the Shareholder-Director Exchange (SDX). SDX represents the collective thoughts and perspectives of a group of leading independent directors and representatives from some of the largest and most influential long term institutional investors – examples include Vanguard, Black Rock and State Street. Together this group of representatives will engage and discuss ideas concerning why, how, and when boards and institutional investors should directly engage with one another. The SDX was developed after a series of comprehensive interviews and meetings led by Tapestry Networks, Cadwalader, Wickersham & Taft LLP and Teneo Holdings LLC together with Broadridge Financial Solutions Inc. More than 30 directors, institutional investors, and corporate governance thought leaders were consulted and interviewed as part of its development. Furthermore, a group of 17 leading directors and investors served as part of the working group that helped develop the SDX protocol.

This group of directors and institutional investors have worked together to develop the SDX Protocol. This Protocol represents a set of best practices for companies and investors to operate and communicate and works towards fostering an improved dialogue between market participants and has been designed to create benefits for all involved parties. The 10-point SDX Protocol provides guidance to boards of public companies and the shareholders of these companies about when engagement is required and appropriate, and also provides advice as to how to go about making these engagements more beneficial and effective to all involved parties. By applying the SDX Protocol, boards will have a set of guidance and tools to refer to which has been designed specifically with the aim of simplifying and improving the engagement process with investors. Most importantly, the protocol aims to ensure that the engagement process works effectively for both parties and in the end results in improved value for all shareholders.

The SDX is a collective of best thinking of a broad group of leading corporate governance professionals as to why, how, and when boards and institutional investors should engage directly with each other. Although the SDX Protocol may be applied in the case of a corporate crisis scenario, it is also intended in use to be a more broadly applied framework that creates discussion of and addresses corporate issues that arise as part of the normal course of day to day business.

The post-crisis climate has created market and economic conditions that mean investors need an improved set of best practices from the companies they invest in. They need better processes to rebuild confidence and to have trust in placing their money into companies so that these enterprises may grow and the economy can begin moving forward at a stronger pace. Investors want to see increased focus from companies and their boards on improved and more effective corporate governance practices and the SDX works towards achieving this. Investors have demonstrated a need and necessity for improved direct communication between directors and shareholders and there is a growing call worldwide for directors to engage with shareholders directly. Until recently, the conditions and circumstances under which engagement should necessarily take place has been weakly defined and somewhat unclear. The SDX Protocol has been developed in partnership with board directors and shareholders in combination to help overcome some of these difficulties.

The SDX helps board members get straight to the source when they want to know the views of their shareholders and furthermore long-term investors want defined access to directors to obtain answers and credible viewpoints about the company in which they have invested.

The SDX protocol has been developed to facilitate the building of mutual and shared understanding of key corporate governance matters when necessary, relevant and appropriate. This will improve value for both parties and lead to improved transparency, mutual understanding, and the overall quality of governance in business. Furthermore, improved engagement will reduce transaction and friction costs in the long run.