Communicating smartly to your shareholders.

• Position: Includes related article - Cover Story

There is an important opportunity awaiting corporations that forge effective models for communications with their institutional investors.

In addition to the GM Board Guidelines (presented earlier in this edition of Directors & Boards), another important document that was released this year is the report, "Improving Communications Between Corporations and Shareholders." The report was prepared on behalf of the New Foundations Working Group, an assemblage of unusual diversity in expertise which has been brought to bear on the critical question of how to bring corporations into closer and more fruitful contact with their investors. As the Group notes, "Many of the changes that [we recommend] in this document may well prove inevitable, given the changes that have occurred and continue to occur in capital markets. "Here is their report.

There have been significant changes in the dynamic of corporate governance and investment. Share ownership has become more concentrated among institutional investors, with many now holding larger, long-term stakes in American corporations. In addition, there has been a continuing rise in index funds, which do not typically move in or out of individual companies' stocks but instead hold long-term stakes. These changes have led some institutional investors to become more active owners and seek more responsiveness from some corporations in which they hold investments.

These developments may create significant challenges for some corporations whose practices and policies for relating to their investors sprung largely from an era in which most institutional investors rarely demanded such ongoing interaction. Even those who suggest that substantial benefits can be derived from an active corporate response to this challenge acknowledge that achieving the right balance is a difficult task. How should corporations respond to these new pressures yet maintain the flexibility and autonomy that they need and are accorded under law and tradition?

These issues have been at the center of a year-long set of roundtable discussions held by the New Foundations Working Group. The Working Group is a Harvard University-based group of over 30 individuals with experience and expertise in corporate governance, investment, and corporate policy. Represented among the New Foundations membership are large institutional investors, board members and board chairmen, CEOs, active investors, senior corporate staff, legal experts, experts on the proxy process, and academic researchers. The goal of New Foundations is to suggest new approaches to governance problems that reduce confrontation and promote a more effective corporate governance process.

Overall, the members of New Foundations agree that there is an important opportunity awaiting corporations that forge effective models for communications, and that establish better working relationships with their institutional investors. The Group believes that benefits can be attained without changes in laws or regulations or in the rights accorded investors or reserved to management. Instead, the Group sees an opportunity for the development of practices that bring corporations into closer contact with their investors and permit a better flow of information to occur. This interaction would involve commitments by corporations to an expanded role for informal communications and relationships among themselves and leading investors. In addition, the Group believes that boards of directors can benefit from the regular provision of information that summarizes the broad views of investors and the broad performance of the corporation in the capital markets.

The Group believes that the development of such practices can be of significant benefit to corporations over the long term. Not only can such practices help ensure that corporations receive feedback from the market but these kinds of practices can also give corporations the opportunity to build a better-informed, more stable shareholder base. This in turn can create enhanced support for corporations pursuing sound long-term policies and ensure that new policies are properly understood and valued by the market.

The Group also believes that the development of long-term communications between investors and corporations requires a significant set of commitments by institutions and other investors. Investors desiring to establish such dialogues should commit to becoming sufficiently expert to conduct a meaningful exchange of views, and should also commit to a process and protocols that ensure a constructive dynamic with corporations.

The Goals and Effects Of Enhanced Communication

Corporations and investors have an opportunity to build positive, long-term relationships with one another. Improved communication between investors and corporations can provide a working partnership and a supportive, long-term environment for the formulation of corporate policy. The result can be a more stable, long-term-oriented investor constituency and, in some cases, enhanced access to long-term investment capital.

Keeping fully abreast of, and responding to, the messages sent by investors can create major benefits for corporations. A fuller understanding of the perspective of major investors and the broad opinion of the market can help senior managers and corporate directors to identify both sources of market support, and sources of concern, and the underlying causes of those concerns. This can help corporations to respond to serious problems earlier and more effectively. An understanding of capital market concerns can also give corporations the opportunity to respond to misunderstandings that are present in the market. This in turn can help ensure that the market is educated about good policies, particularly those involving long-term objectives, and that these policies receive understanding and support.

In large, publicly held corporations an investor perspective can sometimes be missing from the boardroom. Expanded communications with investors and the provision of information on the company's capital market performance can help to ensure that an accurate, current investor perspective is represented in corporate decisionmaking.

Corporations should seek to identify serious concerns held by major investors. Such issues deserve substantive, serious corporate response. An open posture with respect to communications can help facilitate a more effective filtering of important and unimportant views and ensure that important concerns that are widely held are responded to while concurrently isolating unpopular ideas.

Changes in ownership structure and market dynamics can create new opportunities for enhanced, direct communication between corporations and long-term investors. Previous patterns of stock ownership...