A Step By Step Approach to Avoiding Common Mistakes When Board Members Engage with Shareholders
A special thanks to iconic boardroom lawyer, Bob Lamm, for his invaluable advice and contributions to this piece.
There was a time in the not too distant past when board members and investors rarely interacted outside of annual shareholder meetings – if at all. Today, however, director-shareholder engagement happens daily in large-cap companies, and is becoming more common in small-cap companies.
A study published in 2018 by the National Association of Corporate Directors reports that 65 percent of surveyed board members of companies with market capitalizations below $300 million had met directly with investors in the preceding year.
These meetings can happen in several different settings for small-cap companies:
- In connection with a capital raise;
- Preceding or during an activist situation; and
- Annually, as part of a long-term investor’s routine diligence.
Every public company officer and director should keep two axioms in mind with respect to director-shareholder engagement. First, it is inadvisable for board members to meet directly with investors without prior approval of the board and knowledge of management. Second, any inquiry from a shareholder directly to an individual board member or board committee should immediately be communicated to management and the full board of directors.
The decision to have one (or more) director(s) meet directly with investors is a serious one that should be evaluated on a case-by-case basis.
- While companies should strive toward transparency – the board’s job is after all to oversee management on behalf of all shareholders – there are certainly situations where declining an investor’s request to meet privately with one or more board members is perfectly reasonable. For example, it’s impractical (and inadvisable) for board members to take every meeting requested by investors; their time is limited, and they (and investors) are better off when they spend their time overseeing the company, rather than talking to every investor who requests a meeting. There are also specific situations where rejecting an investor’s request to meet is the correct decision (see below).
- At the other extreme, it’s usually wise to speak to an investor that holds a large position in your stock. However, size doesn’t always matter, and there are occasions when speaking to an investor with a small position is desirable, either because they are an influential investor, or for other reasons.
The purpose of this article is to provide practical guidance on how board members can avoid common mistakes during three distinct phases of director-shareholder engagement: (1) preparation; (2) meeting; and (3) follow up.
Preparation. Like many things in life, a little preparation goes a long way. Meeting with investors is no exception. Here are some things for officers and directors to keep in mind prior to any board members meeting directly with investors.
- Designees. Long before an investor would like to engage directly with the board, your board should consider designating a board member who is the most suited for that role and most able to address the questions expected to be raised (see Item 5 below); for example, if the investor says it wants to discuss compensation matters, the chair or member of the compensation committee would be an appropriate choice. That person should be an independent board member (i.e., not a corporate insider); they should be comfortable with, and skilled at, speaking on behalf of the board; and, if possible, it should be someone who has some experience speaking directly with sophisticated investors. It’s more important that the designee has the preceding characteristics, than whether they have a formal board leadership title (e.g., chairman, or lead independent director).
- Legal. The board’s designee should spend time with counsel prior to directly engaging with investors. Counsel will likely, among other things, make sure the designee understands the boundaries of Regulation FD, and will also remind the designee that they should limit their remarks to governance issues, as opposed to management issues.
- Operations/messaging. The board’s designee should spend time with management and investor relations professionals to get briefed on all salient corporate messaging. This will help the designee confirm which material corporate information has or has not been shared with the investor community, so Reg. FD is not breached while meeting with investors.
- Governance. Particularly if the board’s designee is not the chairman or lead independent director, they should meet with the chairs of the audit, nominating/governance, and compensation committees to make sure that they have a firm grip on the key board initiatives the board has been working on. As part of this preparation, it’s also a good idea for the designee to review the company’s most recent proxy statement.
- Investor specific. There are a number of different aspects to thorough investor preparation.
a. Get the agenda, first. As a practical matter, it’s a good idea for companies to get a detailed sense of what an investor would like to talk about with a member of the board before the meeting takes place, and also confirm the time parameters for the meeting. Some examples of what investors might want to discuss, include, but aren’t limited to: officer/director succession planning; board composition and tenures; board structure/processes, compliance, officer/director compensation philosophy; the board’s role in strategy development; audit/risk oversight; and any specific shareholder proposals.
b. Bases for declining the meeting. Where an investor is reluctant to provide a detailed agenda, or if the investor doesn’t appear to grasp the difference between management and board issues, it’s perfectly appropriate for company counsel to decline the meeting. In instances where a request to meet in this regard is declined, officers and directors should consider seeking advice from counsel about how the company should subsequently speak publicly about the declined meeting, if at all.
c. Investor’s position size. Investors have small, medium, and large positions in their portfolios, and for funds registered with the SEC these position sizes are public information. Generally, portfolio managers spend more time and effort managing risk with respect to their larger positions, since their disposition can be more impactful on overall fund performance. Prior to meeting with any investor, directors should know whether their company is a small, medium, or large position for that fund, where possible.
d. Long or short. Investors have long-biased and short-biased positions. In a long-biased position, investors are hoping that your stock price rises above their entry price. In a short-biased position, investors are betting the stock will drop. For obvious reasons, it’s helpful to know whether an investor is long or short your stock before meeting with them. But it’s not so easy: investors aren’t required today to disclose their short positions. That said, sometimes investors write articles on websites like Seeking Alpha, and in connection with those articles they typically disclose whether they are long or short a particular stock. Moreover, IR professionals are often aware of which funds are predominantly short sellers, and can be helpful in this regard.
e. Industry expertise. Portfolio managers (PMs) might know a lot about your company’s industry, or they might not. It’s valuable to know prior to meeting with an investor whether the fund has numerous investments in your industry vertical, or not. It’s equally important to research the background of the PM with whom you’ll be meeting, because even if the fund doesn’t have material exposure to your industry, the PM might either come from industry, or have made numerous investments in your industry during a previous investing tenure.
f. Macro/micro performance. Like everyone else, fund managers are happier when their fund is performing well, and/or their investment in your company is performing well. The opposite is also true. Accordingly, an integral part of preparing to meet with investors is to know not only how their fund is performing year to date, but also how their investment in your company might be performing since its acquisition. If the investor with whom you’re meeting isn’t an SEC registrant, it will be more challenging to find these data. That said, enterprising IR professionals can sometimes fill in many of the blanks by plumbing buy-side sources.
Some quick things to keep in mind regarding investors who are short your company’s stock.
- Shorting stocks is as legal and ethical as buying them long.
- Are there abusive, unlawful short sellers? You bet there are. But, there are likely just as many who are long-biased.
- Small-cap officers and directors often are adamant that they would never meet with investors who are short their stock. Those officers and directors don’t realize that they regularly meet with investors who are short their stock; they just don’t know it.
- Long-biased investors aren’t necessarily friends or supporters of the company; they are in business to make money for themselves and/or their fund’s limited partners. A company’s largest long-biased investor could sell their stock tomorrow, and become short… just like that.
- There is a much finer line between long and short sellers than most small-cap executives think.
Something small-cap officer and directors often learn the hard way is that they can likely learn much more from meeting with those who are short their stock than those who are long.
Meeting. Not surprisingly, no two meetings between board members and shareholders are the same. That said, there are some best practices board members should consider.
1. Attendance. As a general rule, board members should strive not to meet with shareholders alone. At a minimum, it’s a good idea to consider having counsel present to ensure that improper questions aren’t asked, and ill-advised answers aren’t proffered. Moreover, counsel can take notes on the proceeding, which will help to educate the other officers and directors subsequent to the meeting. Depending upon the meeting agenda, it could be helpful for management or another board member to attend. There are some circumstances –for example, if investors have material concerns about the CEOs performance or compensation – where it clearly wouldn’t make sense to have the CEO in attendance. However, if the investor is principally concerned about understanding the board’s role in strategy, for example, it could be additive to have the CEO there to make sure the board member has some assistance if the conversation gets increasingly granular about technology, etc. Note that while many investors are fine having counsel come along, there may be resistance to having the CEO or other members of management attend; that’s perfectly normal and is not a danger sign in itself.
2. Less is more. Investors often want to meet with board members simply to have their concerns “heard.” Experienced counsel often advise board members that, first and foremost, they should default to “listen mode” when meeting with shareholders. When board members are asked directly for information, they should answer as succinctly and factually as possible; i.e., these meetings are not the place for long-winded editorializing.
3. “I don’t know.” No matter how informed and expert the board member, no one can be expected to know everything about the governance of a public company. When in doubt, it’s much better to simply respond: “I don’t know the answer to that, but I can find out and make sure to revert back with the answer.” If you promise to follow up…you need to follow through.
4. Better safe than sorry. If a meeting with an investor is getting overly contentious, or the questions continuously call for answers that are outside the boundaries of what a board member should be discussing, it’s best to respectfully terminate the meeting instead of saying something ill-advised.
5. Stick to the agenda & time parameters. When the subjects set forth in the agenda have been discussed or the time parameters have been reached – whichever happens first – it’s advisable to end the meeting to avoid it becoming a protracted “fishing expedition.”
6. Attorney–client privilege. Some board members who meet with investors accompanied by company counsel wrongfully assume that the contents of their conversations with an investor are attorney-client privileged. Though board members should confirm the same with counsel prior to engaging with investors, anything said to an investor, whether or not counsel is present, is almost certainly not privileged.
One experienced board member told SCI: “When I meet with investors directly, I assume that anything I say is going to appear on the Internet immediately after the meeting, both because it has happened to me, and because it gets me in the correct mindset.”
Follow up. Subsequent to meeting with a shareholder, board members should consider the following deliverables.
1. Educate the board. Director-shareholder engagement is often equally as educative for both parties. It’s critical for the board’s designee to educate the entire board as soon as practicable about the meeting and its takeaways. The board should seek advice from counsel about whether that information should best be disseminated orally, or in writing.
2. Executive session. Depending upon what was discussed during the board designee’s investor meeting, it might be advisable for the designee to debrief with only the independent board members; i.e., without the CEO present.
3. Deliverables. If the board’s designee promised the investor they would revert with certain information, they should inform the board. Provided the board (and counsel) agree with providing that information, the responsive information should be delivered to the investor as promptly as possible. If the decision is reached not to disseminate the information sought by the investor, the investor should be contacted, subject to advice of counsel, with an explanation as to why.
Private meetings between shareholders and board members are becoming commonplace in public companies of all sizes. They aren’t always advisable, but when they take place subsequent to thorough preparation, they can be highly constructive for both parties.
 Traditionally, corporate lawyers used to advise board members that they should never meet with investors. These meetings are now so common that declining to meet – as a matter of principle – is no longer an option.
 This article is principally geared to boards that are approaching investor engagement for the first time; some of the preparatory work can be less formal/structured for boards that more routinely engage with investors. That said, the best practices set forth are intended to serve as touchpoints even for boards with considerable investor engagement experience.
 Just a quick reminder that Small-Cap Institute doesn’t publish or provide legal advice, and isn’t authorized to do so. When in doubt, officers and directors should be guided 100 percent by advice of counsel in all business matters they confront.
 Boards of directors oversee management’s operation of the company; they don’t actually operate the company. Accordingly, part of preparing for a board member to meet directly with an investor is qualifying that the dialogue is going to be limited to issues within the board’s purview, versus management’s purview.