Should directors meet with shareholders?

• Author: Miles, Michael A.

If circumstances call for such a meeting, here are several suggestions for maximizing the usefulness of this session.

An important question confronting chief executives, boards of directors, and institutional shareholders is whether nonexecutive directors should meet with the institutional shareholders. My view can be stated unequivocally in two words: "Yes, but...."

The "yes" part is fairly obvious. Shareholders are, after all, the owners of the company and are the "bosses" to whom the directors are accountable. As such, shareholders - and I believe that includes all shareholders - have the fight to meet with whomever they have a legitimate reason to meet with - be it the CEO, other members of senior management, or the directors of the company.

The "but" part is also fairly obvious. Primarily because of the nature of the role of all nonexecutive directors, there are certain circumstances and conditions that should exist to warrant such meetings and make them useful for all concerned - absent which I would suggest such meetings should not take place.

The first condition is that there be a specific, significant reason for the meeting, such as a major question, or complaint, relating to overall corporate strategy, performance, or corporate governance. Without such a specific "global" corporate issue, I do not think director/shareholder meetings are a good idea, for reasons I will address below.

The second condition for a director/share holder meeting is that it should take place only when more traditional channels of communication have been tried and deemed to have failed.

In general, most shareholder communication starts and ends with the investor relations department. But, in the case of institutional and very large individual holders, it is now not unusual for there to be direct communication with more senior management as well.

In a survey done by Institutional Investor, 90% of the companies surveyed claimed to engage in formal, direct communication between top management and institutional shareholders, with 80% claiming CEO involvement in the process and 94% saying the CFO participated in such communication. Ninety-one percent of the companies said they maintained both formal and informal communication with institutional shareholders, and 75% said investor relations were either very important or extremely important to them. If these findings are representative, it appears that the normal communication channels between institutional...