ACROSS THE POND

Point of
no return?
David W Anderson, President, The Anderson Governance Group

For years, pressure has been building among

shareholders for deeper, more meaningful dialogue
with their boards. With their capital at very evident
risk, they desire greater influence over corporate
decision-making and, more significantly, more
direct control over the composition of the board
itself. Regulators in the UK have obliged, putting a
stronger provision for dialogue into the new Code,
reinforcing the expectation that true accountability
will be found in the hands of owners.
US legislators have come to the same conclusion,
writing into the Dodd-Frank Act a requirement for
public companies to hold non-binding advisory
votes on executive remuneration (say on pay) at
least every three years and giving the US Securities
and Exchange Commission (SEC) expanded power
to create simpler, more cost-effective means for
shareholders to nominate directors (access to the
proxy). US investors are now catching up with
their UK cousins.
It remains to be seen if shareholders will seize
the opportunity provided by these regulatory and
legislative advances. Merely putting the right tools
in shareholders hands is not enough. Directors
and shareholders have to be willing to engage
with each other. It seems that the perspectives of
directors and investors on both sides of the Atlantic
are becoming more in line with each other. More
importantly, both parties know they are in a critical
period where their role and relative power in the
system of corporate leadership is being defined by
the actions they take.
Thus UK and US directors are grappling with
a fundamental question: how to embrace
shareholder involvement in order to benefit
from shareholder perspectives without courting
interference, sowing confusion or diminishing
their power to govern effectively?
Directors realise that shareholders want to
influence corporate decisions and express concern
over their loss of relative corporate power. They
argue that business decisions made further away
from the reality of that business may make firms
less competitive. In contrast, shareholders see the
risk theyve already experienced in lost enterprise
value due to poor decision-making, in which they
were not involved.
Boards in Canada are responding to these
pressures by adopting merit-based director
nominations, making their board composition
18 www.charteredsecretary.net

strategies more sophisticated and looking to more

diverse pools of talent. In disclosure documents
and direct meetings with key shareholders, they
are giving an explicit description of what they are
looking for in directors, how expectations have
evolved and what is being done to keep directors
up-to-speed in the business. These boards are
earning the respect of shareholders.
The new UK Code puts the onus for effective
shareholder dialogue squarely on the shoulders
of the board chair. Certainly, an independent
board chair ought to take the lead, however,
there is a wider opportunity here. In Canada,
the governance/nominating committee and its

Boards need to understand shareholder

interests, objectives and concerns.
chair may play a vital role. It can identify
upcoming relevant issues and explain those
issues to the board. It can recommend appropriate
strategies for shareholder engagement, make
better director nominations and devise director
development with a mind to creating a board
that functions well and knows how to interact
with shareholders.
Boards need to understand shareholder
interests, objectives and concerns in order to
adequately assess the opportunities and risks
facing the business. The board chair, along with
the governance/nominating committee, should
develop a shareholder engagement philosophy,
provide directors with necessary training and
coordinate shareholder dialogue with management.
With input from shareholders, the governance/
nominating committee may put forward
talented and credible directors to shareholders,
demonstrating in the process respect for
shareholder perspectives.
The actions of legislators and regulators,
combined with the growing expectations
of shareholders and a deepening sense of
accountability on the part of directors is bringing
about a realignment of power in corporate
leadership. The status quo is no longer an option.
It remains to be seen if this new regime will
produce the results it has been created to achieve.

ABOUT THE AUTHOR

David Anderson MBA PhD ICD.D is the
President of The Anderson Governance
Group based in Toronto. He can be reached
at david.anderson@taggra.com and
+1 (416) 815 1212.