Corporate Board Members and Investors Contemplate Key Governance Issues, Protocol for Engagement
Direct engagement between Investors and Board Members an important element of good governance
Two high-level initiatives focused on the topic of board–investor dialogue have resulted in the release of papers in Q1 this year, highlighting the growing recognition that engagement between shareholders and directors can improve corporate governance and protect investors. Calvert was a part of the working group that developed the Shareholder Director Exchange Protocol (SDX) released in February and together with other major investors joined a February meeting convened by with the National Association of Corporate Directors (NACD) to discuss key governance issues for 2014.
A group of independent corporate directors and representatives from large long–term institutional investors came together to develop the SDX Protocol. The protocol addresses the increasing levels of direct engagement between institutional investors and public company boards, an important changing dynamic affecting public companies and investors. Engagement is typically between investors and management, but there is a growing interest on the part of investors and directors for more dialogue, especially when fundamental corporate governance or sustainability issues emerge. The protocol helps lay the basis for productive engagement and addresses concerns that each side may have.
During the NACD investor dialogue, participants stressed the importance of moving beyond process and into substance. With more than 14,000 members the NACD is the most prominent corporate board member organization in the United States, and hence plays a major role in defining the standards for boardroom practices. In the February discussion (summarized as a report for NACD members “Investor Perspectives: Critical Issues for Board Focus in 2014”) the investors highlighted board composition (including talent sets, independence and diversity), director tenure and director refreshment as key issues.
An interesting theme emerged about the need to get past some of the basic board structure issues (related to director elections and shareholder rights) to dialogues that help investors assess the quality of a company’s board, the nature of the conversations within the board room and how well boards understand the value creation process of the companies they lead.
Calvert’s view is that we need process and structure in order to ensure integrity, accountability and investor protection. However, as essential as these governance basics are, investors and corporate boards also have much to gain from dialogue and transparency that moves beyond the basics to explain how the board as a group works to ensure the long-term success of the firm.