Allen & Overy / Citigate First Financial seminar - Let’s start the dialogue!

Published in our newsletter of 13 December 2011– The end of November saw the second seminar on annual general meetings, or AGMs, dubbed ‘Annual Meeting 2012: What’s new?’, a joint initiative of Allen & Overy and Citigate First Financial. The annual report and the annual general meeting are two fixed communications platforms in the relationship between companies and their shareholders. The seminar explored in great detail just how companies can make these platforms more valuable in the dialogue with their shareholders.

A director is also human. In times of economic uncertainty, it is very tempting to shut the doors and windows. At the same time, the call from shareholders for transparency is actually on the increase, especially during times of crisis. There are many angles to shareholder engagement. So who will take on the challenge of creating a truly constructive dialogue?

Shareholders, and directors alike, have been dissatisfied for some time with this two-way relationship. Although legislation has provided some handles on this issue in recent years, the relationship all too often remains stuck in a vicious circle. Directors are suspicious because investors were seemingly obsessed by the rules of corporate governance and focused almost exclusively on deviations from those rules. Shareholders in turn felt as if they were all too often denied an open and constructive dialogue with the management and turned to box ticking and the media to step up the pressure.

As ever, the truth lies in the middle. The bottom line is that this two-way relationship revolves around trust and integrity, and both sides need to invest if they want to achieve a true dialogue. The annual report and the annual general meeting are useful starting points in this relationship between shareholders and companies, but they are not enough by themselves. During the seminar recently organised by Allen & Overy and Citigate First Financial, the discussion focused on how these platforms can be made more meaningful in the dialogue between companies and their shareholders. Among the proposals was the publication of a provisional agenda with the announcement of the shareholders meeting.

There was also discussion about the role of non-executive board members and how they communicate this role in the annual report. It was noted several times that the true dialogue takes place outside those platforms and that the real decisions are also taken elsewhere. So a lot more is needed to create genuine shareholder engagement.

We should look at what companies can do. First and foremost, to develop a successful relationship with its shareholders, a company has to really know who its shareholders are. This may sound like a Johan Cruijff sound bite, but it does presume a continuous and pro-active IR policy. Every company clearly strives for a stable group of shareholders. The question is how realistic this goal is in a world in which an ever growing number of parties from a wide variety of backgrounds are entering the financial markets. A continuous awareness of what is happening in the markets is the only way to remain up-to-date.

Following this train of thought, a company should aim to treat its various shareholders equally. Do not try to avoid the activist shareholder, because potential problems are not always going to go away by themselves. But also maintain an active dialogue with ‘passive’ shareholders. There is a tendency to ‘ignore’ these shareholders, including many institutional investors, because they are in it for the long haul due to their investment strategy. Neglecting this relationship can be costly for a company in the end, especially at a time when the company may need their support immediately, for instance in the case of sensitive issues relating to corporate governance or a hostile takeover bid.

Another aspect is empathising with shareholders. Not everyone is able to truly listen, rather than of simply sending out signals. After all, what this is about first and foremost is the shareholder’s perception of the company. And what will the company management do with this information?

Finally, non-executive board members could play a key role and support the management in the dialogue with shareholders. The frequently heard argument against this is that this would jeopardize the supervisory role of the non-executive board member and that this would not fit in with our ‘Rijnland’ model. However, the Anglo Saxon model with its one-tier boards is not exactly a Holy Grail in this respect. A recent survey showed that the chairmen of the FTSE 350 were falling short of their responsibility with respect to corporate governance. So the fact that, in the Netherlands, we generally operate with two-tier boards is not sufficient explanation for the all too common invisibility of non-executive board members.