The Annual Meeting: From Gloss to Dialogue

Directors & Boards ran an important series of articles in its 1st quarter 2011 magazine on Fixing the Annual Meeting. Some excellent ideas are put forward, especially if we parse out the thoughtful from the conventional. (Link through the Shareholderforum to a compilation of most of the articles cited below from Directors & Boards and also reference their extensive review of electronic meetings.)

One of the most dramatic ideas, central to any real attempt to actually make annual meetings worthwhile, is the major survey finding by David Shaw, publishing Director of Directors & Boards. 90% of shareowners responded that annual meetings are “very important” or “somewhat important.” Contrast that with 78% of public company directors, who responded that annual meetings are “somewhat important” or “not very important” or “not at all important.”

Until directors recognize the importance of annual meetings to the shareowners they are supposed to represent and take their related duties seriously, the schism is likely to remain or grow.

Let’s look at the advice given by authors in this focus issue, starting with those given the largest space, since we can presume those authors reflect the most conventional wisdom (assuming Directors & Boards, a very prestegious publication, has been able to attract the leading thinkers).

By far the largest space is given over to Carl T. Hagberg, an expert, having served as inspector of elections at hundreds of annual and special shareowner meetings. He is dedicated to helping companies “optimize their spending on investor relations and on their investor servicing programs” and has been awarded the highest honor bestowed by the Society of Corporate Secretaries and Governance Professionals.

Hagberg first lays out why annual meetings appear to be a waste of time and money.

1. “At the vast majority of them, nothing of significance ever happens.”
2. “Average investors don’t care.” As few as 10% bother to vote.
3. A high portion of those who show up are, “to put it kindly, out-and-out coo-coo birds.” “They hog the floor to ‘introduce’ their proposals (which are already introduced in the printed matter…).”

Although they appear to be a waste of time and money, Hagberg isn’t ready to give up because:

1. Senior managers and directors should give an accounting of their stewardship.
2. Annual meetings provide a cost-effective ‘safety valve’ for emerging issues that “can have an impact on a company’s long-term bottom line.”
3. They present a “truly unique opportunity” to size up the leadership team “and the real culture of the company.”

Hagberg offers several fixes:

• Virtual-only meetings for those 12,000-plus companies with “nothing controversial on their agenda, and who typically have no one show up…” Hybrid meetings are an option for 750 companies “that like their annual meetings and think they add value.”
• Virtual forums before shareowner meetings can serve as “an early warning sign” and “useful pressure-release-valve” in a controlled environment.
• Companies need to educate shareowners about why annual meetings matter.
  • Design packages and meetings to command attention, not legality (although you still need to accomplish what is legally required).
  • Provide instructions on how to decide and why it is important to vote.
  • Use the Internet as a marketing and educational tool. Motivate shareowners “to pay a bit of attention, cast their votes while they’re at it, and, ideally, vote with management recommendations.”

Second place for space goes to Richard Daly, CEO of Broadridge Financial Solutions whose firm has a monopoly on integrated voting/forum/virtual meeting platforms. While informative, Daley’s recommendations boil down to a simple mantra, use our products.

One shareowner was among the major contributors. David Silverman, of the Blue Harbour Group, “invests in undervalued firms where there is an opportunity to work in collaboration with management in order to bring creative alpha generating ideas to assist in the unlocking and creation of shareholder value.” Silverman’s recommends more discussion of governance issues, since “governance informs quality decisions over the long-term.” Show shareowners how the board and management eat their own cooking by closely linking pay to longer-term value creation.

Smaller space is given over to an excerpt from a seven year article from Norm Augustine (retired chair of Lockheed Martin), Gary Lutin (Shareholder Forum), and Jeff Morgan, CEO of the National Investor Relations Institute).

Augustine reported that “no self-respecting large shareholder would normally be seen dead at an annual meeting, nor would most analysts.” Managers would rather get a root canal. I don’t think any firm has embraced his five part plan that emphasizes back and forth dialogue through an impartial mediator:

1. In the annual report, provide a “plain-English presentation” of the top 10 issues and how management plans to deal with them.
2. Shareowners submit questions they would like addressed by management to an independent auditor.
3. Auditor eliminates duplication and irrelevance and submits to management.
4. Management responds.
5. “Shareholder voting would take place by electronic mail or snail mail, again according to each shareholder’s preferences.”

Gary Lutin boiled down his forum’s advice to three simple admonitions:

1. Shareowners want to hear from company managers, not intermediaries.
2. They want “Forum Tools” that can be made available.
3. They want to be able to ask questions, know what others are asking and observe management’s response.

Jeff Morgan recommends viewing the annual meeting in the context of other IR objectives: offering more ways to connect, increasing transparency through better publicity and encouraging directors to attend and engage.

More interesting recommendations came from an assortment of commentators, investors and advisors many of whom are not as well known for their opinions on annual meetings and whose space was limited to 10o words or less.

• Jule Garland McLellan: Add meaningful exchanges between annual meetings.
• Eleanor Bloxham: The board should report directly at the meeting on how they added value for shareowners and stakeholders, as well as on their plans to improve performance in future years.
• Andrew Shapiro: Committee chairs should present their accomplishments and goals for the coming year. Shareowner input should be solicited and a dialogue held.
• C. Warren Neel: Have audit and compensation committee chairs offer planned comments to provide awareness of their work.
• Mike McCauley: Directors should discuss items placed on the agenda by shareowners.
• Glyn Holton and James McRitchie: Hybrid meetings should become a testing ground for independent facilitators, Q&A around each proxy item, and other measures to facilitate real deliberation.
• Matt Orsagh: Meetings should have “less-scripted discussion” of risks and opportunities, with questions from shareowners.
• Cornish Hitchcock: Directors should answer questions from shareowners.

Let’s bring in one more voice from the Boards & Directors issue that wasn’t included in the special section on annual meetings. Chrles M. Elson, Director of the Center for Corporate Governance at the University of Delaware appears much more respectful of shareowners than Hagberg.

You will recall that Hagberg characterizes a high proportion of meeting attendees as “out-and-out coo-coo birds” who “hog the floor to ‘introduce’ their proposals.” In contrast, Elson believes greater participation by shareowners and their growing influence on corporate affairs is central to the modern corporate governance movement.

That increased involvement began when the SEC enforced the shareowner’s right to include proposals in corporate proxies. This right, won by the Gilbert brothers, has taken “about 70 years to reach its potential.” (The shareholder proposal — the little resolution that could)

Now, let’s look for input to one more source, an expert in investor relations who believes IR is more than gloss and presentation.

Dominic Jones recently wrote of the Cocal-Cola Company’s attempt to reach out to investors before their annual meeting through an online “shareowner forum.” CEO Muhtar Kent explained to shareowners: “As an investor in our company, your voice is absolutely critical to our future. This website was designed to allow you to more easily share your voice and also vote your shares.”

But, as Jones points out, shareowners can’t share their “absolutely critical” viewpoints with one another on the platform used. Coke already has a better discussion forum, that does allow for such interactions, its Facebook page with 23 million fans.

Company representatives regularly patrol and participate in the Facebook page’s discussion board, where anyone can start a new discussion topic and engage with other page users and the company. Even shareholders are showing up to ask questions, although no one from the company seems to want to talk to them.

Their shareowners “forum” will seem to many to be far from the once self-proclaimed “real thing.” “How Coke’s shareholder website qualifies as a forum by any definition escapes me,” writes Jones. “It seems like little more than a PR stunt.”

Coke is using a poorly conceived shareholder forum product developed by Broadridge Financial Solutions Inc. (NYSE: BR), whose CEO has been lobbying SEC chair Mary Shapiro to make it mandatory for companies to offer his company’s brand of forum. We should all hope he fails. (At Coca-Cola, investors get less say than Facebook fans | IR Web Report, 3/15/2011)

The Takeaway: Corporate culture matters, not just to the brand loyalty of consumers but to the loyalty of investors. If the opportunity to dialogue with shareowners at annual meetings and to facilitate discussion about long-term challenges and governance issues is taken seriously, companies are likely to retain a large proportion of their shareowners each year who will stick with them through thick and thin. If managements and boards view annual meetings as a legal formality with “out-and-out coo-coo birds,” even if they make glossy presentations, they are likely to face fewer but more hostile attendees who are only interested in the short-term.

Over time, managements and shareowners with the same values tend to gravitate together.  At one extreme are companies eager to show off their wares and have a genuine dialogue at their annual meetings; think Berkshire Hathaway. At the other extreme are companies like the one that inspired Jim Kristie, Editor and Associate Publisher of Directors & Boards, to focus an issue on fixing the annual meeting.

It was an interesting company, not performing well — a combination of industry ill winds and shaky management. So I figured the CEO had some explaining to do, and I wanted to see how he took advantage of this opportunity…

The meeting was over in 10 minutes. Management ran through the process at a sprint, giving no presentation nor taking questions.

Sure, investors might be willing to take a gamble on a company with glossy presentation skills. Hold shares until someone presents them with a better picture. However, companies who want investors to become long-term shareowners must recognize they are essentially taking on partners who will want to engage in genuine discussion with each other, with management and especially with their elected representatives. Companies that don’t use their annual meetings to promote such discussions are missing an important opportunity.

Disclosure: The publisher of CorpGov.net has investments with a fund run by Andrew Shapiro and with Berkshire Hathaway.