To make this long post a little easier to navigate, I’ve divided it in two. The second part deals directly with the article by Gilshan and Jackson posted on the Harvard Law School Forum on Corporate Governance. The first part explains how I came to that article and provides some context. I could have published only the second part, but in the first part of this post I explore some ideas and make some connections that are important to me — maybe only to me. So I kept it.
The frustration of Rio Tinto shareholders meeting – which I blogged about here — had its source in what I described as a lack of serious engagement with shareholders, or at least certain shareholders, by the Rio Tinto board. Shareholders who brought a broad range of social, human rights and environmental issues to the board’s attention – and took pains to describe the business risks they posed – were met with polite indulgence, a touch of condescension and a deaf ear.
Looking back on the meeting, I wonder if the board would have treated these people differently if instead of bringing questions for the board they had put resolutions to their fellow Rio Tinto shareholders. Given how these resolutions usually go, I wonder, too, whether environmental and human rights resolutions would have really gotten a fair hearing, or a very warm reception, at the London gathering.
As it happened, Walsh and du Plessis stuck to what was clearly a question-taking strategy to make the board appear gracious and open: they thanked shareholders for traveling from all corners of the earth to address them, complimented people on how sincere and well-spoken they were, and they gave lip service to “respect.” To be fair, they hardly had time to get through all the questions (controversy follows Rio Tinto wherever it goes in the world), and there was no time for follow-up or the give and take these matters require. So they stonewalled where they could, punted where they had to, and got through it.
I’ve been trying to think about ways to make meetings like these better. It’s related to my interest in non-coercive dialogue and the way that language and power work, which I’ve written about a number of times (here,here and here, for instance) in connection with what I call the power of asking. It’s connected, too, with my love of the Upper Peninsula of Michigan, which developed in the course of working on my film, and my concern that the new mining boom there, if it is allowed to proceed unchecked, will spoil the UP and endanger life on Lake Superior. So I have some personal stakes here. But there’s also a side of the issue that goes far beyond my own interests, and is really about the healthy governance of institutions and about the possibility of institutional renewal.
Part of the trouble, as I see it, might be that the Annual General Meeting is the only chance these shareholders get to address the board directly and in person, face-to-face. They may have corresponded and met with company representatives, but it’s not every day that a representative of Mongolian herders or Keweenaw Bay Ojibwe or the NRDC can talk face-to-face with Jan du Plessis or Sam Walsh. The AGM provides that opportunity – or at least it brings everybody into the same hotel ballroom, stages the exchange and creates the illusion that a conversation of some sort took place. It’s a poor substitute for a real conversation – nothing that even remotely approaches a dialogue in which both parties feel heard and heeded; and I would be surprised if most shareholders would not like to see some other format emerge, one that allowed for richer, more continuous and deeper exchanges, or at least something a little more nuanced and intelligent than a question period followed by voting.
This is something both boards and shareholders need to remedy, not just so they can feel heard and listened to – which is not a trivial concern – but also so they can serve the long-term interests of the companies they direct and own. One way to make AGMs more successful might be to extend the conversation and create other opportunities for owners and directors to engage.
For Deborah Gilshan and Catherine Jackson, both of whom work on corporate governance issues from inside investment houses, it might even be time to rethink the entire shareholder communications process. Noting that in U.S. companies communication between shareholders and directors often runs “unilaterally through press statements and proxy disclosures rather than in face-to-face exchanges,” Gilshan and Jackson suggest a more “pro-active” approach. In a post that appeared today on the Harvard Law School Forum on Corporate Governance, Gilshan and Jackson “Call On U.S. Independent Directors to Develop Shareholder Engagement Strategies.” They advocate making “independent director meetings with shareholders… a routine part of a board’s approach to outreach with its shareholders.”
Engagement is a two way process and pro-active companies reach out to shareholders in addition to shareholders reaching out to companies. Voting, in itself, can be a blunt instrument and engagement is critical to enhance the voting process, to make it more meaningful and representative of the views of shareholders.
Ultimately, engagement between shareholders and independent directors increases the responsibilities on both parties. Directors are accountable to shareholders as their representatives in the boardroom, and dialogue between both parties is part of that framework of accountability. Engagement with shareholders should be embraced by independent directors as an opportunity to demonstrate their effectiveness and to create long term relationships with shareholders based on mutual respect and understanding.
Face-to-face meetings and conversations should be part of “an integrated approach in which governance matters are addressed as routinely as financial and operating results,” Gilshan and Jackson argue. Of course it will take “appropriate resources to support these activities,” but that’s probably a drop in the bucket, especially when you consider what the alternative — friction, fights, failure — already costs.
Gilshan and Jackson note that in many U.S. companies shareholder communications are delegated to management – which tends to see “investor relations” as an exercise in public relations — and many boards simply don’t respond to shareholder communications. It’s tempting to think that social media, mobile and the internet will continue to transform these activities, but that’s not going to bridge the communications gap. It starts with the board and owners recognizing that they have an important mutual responsibility to one another; and technology doesn’t relieve them of that responsibility. Sitting down together in the same place and talking together, person to person, without the mediation and interruptions of technology, may not resolve all your difficulties: you may not ultimately see eye to eye, but at least you will have looked one another in the eyes. Social proximity allows us to take measure of each other in ways technology – which relies on and creates distance – does not. I would like to think, along with Gilshan and Jackson, that “mutual respect and understanding” will necessarily come out of these meetings. But at the very least, you can meet someone in person just to know how far apart you really are. And I suppose that’s one kind of respect.
In the work I’ve done as a consultant and facilitator on these issues, I’ve learned that the real challenges come when you start to consider engagement “strategy.” One question that comes immediately to mind is how to ensure that independent directors are meeting with a broad spectrum of shareholders, and not just high profile activists, big investment houses, or institutional shareholders (like pension funds). This is especially important when it comes to social, environmental and human rights concerns, which may not necessarily be on the radar of bigger shareholders, but nevertheless represent (among other things) important business and reputational risks for any board to consider.
Then there is the question of keeping the dialogue honest. This is a huge subject, but I will confine myself to a single caveat. That has to do with attempts to “manage” the dialogue from the company’s side. As Gilshan and Jackson observe, “some independent directors are actively seeking input from their shareholders to pre-emptively manage situations, while others are interested in understanding shareholder views on certain matters.” But understanding is one thing; and managing is another. If the objective in meeting with shareholders is to manage their concerns rather than address or at least represent them to the board, then the director is doing everyone a disservice. Sure, meeting with shareholders and talking with them about their concerns will help defuse tensions and make confrontations at the AGM less likely, but the aim here ought to be understanding and above all a deep appreciation of the shareholder’s concerns.
Another question hangs over all of this, and over all opportunities for dialogue: the question of power. How can directors and shareholders meet on equal footing? In some cases this won’t be a problem. In others, it is the problem: the deck is stacked. It’s worth thinking about how face-to-face dialogues might alter that power dynamic. Equal footing can be very hard to achieve but there are a number of approaches that can be taken to ameliorate the situation — establishing a neutral place for the meeting, sharing personal stories, using the services of a facilitator, defining terms and boundaries in advance of the meeting – but these measures would have to mutually agreed upon; and it’s probably best if the rules of engagement for any dialogue are something both shareholders and the board create together, to the extent possible.
The quality of any face-to-face meeting, the quality of any dialogue, is going to come down to the commitments that both sides make and how well they uphold those commitments. Activists can easily demonize companies and boards, especially in high stakes situations; and boards can tire and be dismissive of shareholders who tell them what’s at stake: they seem disruptive (and they are, I would say, but in a positive way) and so removed from the real business at hand – mining, banking, or whatever the case may be. There’s the urge to put them off or direct them to people whose job it is to manage and handle them, through corporate social responsibility channels and community outreach programs. That’s just another way of delegating to management some of the director’s most serious responsibilities.