The communications role of the corporate board and its members in shareholder activism has long been a challenging one.
Should the professional managers in the C-suite, appointed by the board and involved in the company's affairs on a daily basis, be the sole communications channel with activists? Or should directors meet with activists who may potentially seek to oust them for perceived failures?
This perennial question is taking on a greater urgency due to the remarkable increase in activism during the past decade as well as changes in how investors regard their level of engagement with the companies they own.
Activists thrive when communication breaks down between company leadership--including the board--and the shareholders whose interests they are expected to advance. The job of communicating with activists primarily belongs to the same professionals and subject matter experts--the IRO, CFO and, when appropriate, CEO--who ordinarily manage investor communications. However, when corporate governance is specifically at issue, it is sometimes reasonable and necessary for members of the board to step forward.
Clearly not every activist requesting a meeting should get one. Boards should consider the size and length of the holding, the activist's track record of constructive engagement at other companies, and whether the activist has already exhausted other, more standard, channels such as speaking with the CFO or CEO. And a meeting is certainly more advisable if the board already believes the activist's strategy is worth serious consideration. But in certain instances, a case can be made for "keeping your enemies closer" even if the company and board view the activists as counterproductive to their strategic plan for the business.
Meeting with the activist gives the board a chance to hear assertions and demands, without them being filtered by management. The board can gauge first-hand whether the activist would be a valuable addition to the boardroom, or just a distraction. Engaging directly with activists also enables boards to demonstrate that their commitment to good corporate governance is more than just words. We have found concerned investors often are reassured when they see and hear from an engaged board. Usually activists are looking to effect change, not just engage in a fight. If sensible activists meet with a board that credibly shows it is receptive to new ideas, well versed in the strategies and initiatives underway at the...