Framework and Tools for Improving Board-Shareowner Communications

FRAMEWORK AND TOOLS FOR IMPROVING BOARD-SHAREOWNER COMMUNICATIONS

THE REPORT OF THE COUNCIL OF INSTITUTIONAL INVESTORS– NATIONAL ASSOCIATION OF CORPORATE DIRECTORS TASK FORCE ON IMPROVING BOARD–SHAREOWNER COMMUNICATIONS

Published by The National Association of Corporate Directors®

In partnership with The Council of Institutional Investors Introduction

he Council of Institutional Investors– prising that many shareowners believe that their National Association of Corporate Di- views are not welcome or heard, and that they Trectors Task Force on Improving are not truly represented in the boardroom. Board-Shareowner Communications was es- Feeling that there was much to be gained by tablished in early 2003 in the wake of a series a cooperative and creative effort to try to over- of corporate scandals. In many cases, these come the longstanding barriers to shareowner- scandals resulted from governance failures that director communication, the Council and harmed shareowners. NACD formed a Task Force of directors and Many shareowners have been frustrated over shareowners to explore the situation. the years by what they see as a wall between The goal of the Task Force was to look be- them and their elected representatives, the yond the usual pat criticisms and defenses of board of directors. They feel that they have no current practices—to make an honest assess- input into selecting director nominees, no ment of the current system’s strengths and meaningful choice in their election, and, gener- weaknesses and to suggest some ways that di- ally, no hope of ever hearing from or exchang- rector-shareowner communications, and rela- ing views with them. Very few companies have tions, might be improved. encouraged shareowners to meet with the inde- During the group’s deliberations, reforms pendent directors to discuss issues of con- began to occur. In response to the corporate cern—indeed some companies have a policy governance scandals, Congress, the Securities against such meetings. Also, some companies and Exchange Commission (SEC), and the have not required their directors to attend the stock exchanges also began addressing the annual meeting, or even let them respond to problems, and a number of new rules and regu- shareowners’ questions. Therefore, it is not sur- lations were adopted—including several focus- ing on board-shareowner communications. Among other things, the New York Stock Ex- TABLE OF CONTENTS change (NYSE) amended its listing standards Introduction 2 to require listed companies to disclose a method Executive Summary of Best Practices 4 for interested parties with concerns to commu- Background 5 nicate directly with either a designated “presid- The Task Force’s Recommended Best Practices 11 ing” non-management director or with the non- Appendices 18 management directors as a group. (For further details, see the Background section on page 5.) © Copyright 2004 Such rules are a good starting point, but National Association of Corporate Directors www.nacdonline.org turning rules into meaningful avenues of communication will require diligent efforts by both All rights reserved. No part of the contents hereof may be reproduced in any form without the prior written consent of the National Association of Corporate Directors.

2 CII–NACD Task Force Report — Improving Board–Shareowner Communications Introduction

boards and shareowners. This Task Force research conducted by staff (identified at the end port is intended to supplement and expand on of this report). While each individual task force the regulatory initiatives by suggesting some member may not agree with every recommen- practical recommendations, or “best practices,” dation, this report represents a fair summary of that companies might adopt on their own. The the Task Force members’ points of agreement suggestions are based on the experience of and reflects their support for its principal rec- Task Force members and advisors, and on re- ommendations.

TASK FORCE MEMBERS

Members of the Task Force were: Co-chairs: Peter M. Gilbert, Chief Investment Officer, Pennsylvania State Employees’ Retirement System Warren L. Batts, retired CEO and Chairman, Premark, and corporate director Members: Jack Ehnes, Chief Executive Officer, California State Teachers’ Retirement System Richard H. Koppes, Of Counsel, Jones Day, and corporate director Gwendolyn S. King, President, Podium Prose, and corporate director Henry A. McKinnell, Chairman and CEO, Pfizer Inc., and corporate director Richard H. Moore, North Carolina State Treasurer and sole trustee of the North Carolina Retirement Systems Denise L. Nappier, Connecticut State Treasurer and principal fiduciary of the Connecticut Retirement Plans and Trust Funds Jody B. Olson, Chairman, Public Employee Retirement System of Idaho Thomas G. Plaskett, Managing Director, Fox Run Capital Associates, and corporate director Damon A. Silvers, Associate General Counsel, AFL-CIO Coleman Stipanovich, Executive Director, State Board of Administration of Florida William Thompson, Jr., New York City Comptroller, investment adviser to, and a trustee of, the New York City pension funds David Wakelin, Chairman, Maine State Retirement System B. Kenneth West, Chairman and CEO (retired), Harris Trust & Savings Bank, and corporate director Ralph Whitworth, Principal, Relational Investors LLC, and corporate director

Ex Officio members of the Task Force were Sarah A.B. Teslik, Executive Director, Council; Ann Yerger, Deputy Director, Council; Roger W. Raber, CEO and President, NACD; and Peter R. Gleason, Chief Operating Officer, NACD. The late Thomas R. Horton, past CEO of the American Management Association and a corporate director, served on the Task Force during its formative months.

CII–NACD Task Force Report — Improving Board–Shareowner Communications 3 Executive Summary of Best Practices

The Task Force agreed that five things are vital for major, fundamental business decisions such as effective board-shareowner communications. mergers, acquisitions, fundamental business strategy, divestitures, and capitalization issues. Other, 1. The starting point for board-shareowner commu- more routine matters may best be handled by corpo- nications is an ongoing communications program rate staff. Both directors and shareowners should act that includes regular, comprehensive, and pub- in the knowledge that sometimes matters that other- licly available disclosures about important topics, wise might be considered routine occur in contexts including performance and governance issues. that warrant board-shareowner discussion.

2. Boards should provide detailed contact informa- 4. Boards should develop and disclose communication for the corporate secretary and/or other tions policies covering all forms of communica- management representative and for at least one tion, including in-person meetings, telephone independent director. calls, e-mail, and other written communications. Boards may ask a management employee or The Task Force agrees that it is appropriate for someone else to initially receive, organize, and sum- shareowners to communicate with directors, includ- marize communications to the board, disclosing ing through in-person meetings. Directors should: who is responsible and what the process is for for- • Commit to shareowners that they will receive a warding the messages to the board. However, man- response to their direct communications. agement or another party should never block com- • Attend annual shareowner meetings. munications sent to directors. Board members • Disclose ground rules for other meetings with should receive copies of all correspondence ad- shareowners. dressed to them and be made aware of all other com- • Make a good-faith effort to accommodate all le- munications intended for them, no matter what the gitimate and important requests for meetings. topic. • Respond in writing to all requests for meetings The Task Force agrees that the most appropriate involving topics appropriate for board-shareown- contact for board-shareowner communications is er communications. the independent board chair, the lead independent director, the independent chair of the 5. Boards should take an active role in developing nominating/governance committee, or the inde- and adhering to communications policies, and pendent director presiding over executive sessions ensure that communication efforts and policies of the board. are up to date and effective. Boards should take ownership of board-share- 3. To facilitate the communications process, boards owner communications policies, and ensure that should detail which issues are appropriate for policies are reviewed and updated on a regular basis them to address and which are appropriate for to maximize their effectiveness. A specific commit- management. tee, such as the governance/nominating committee Task Force members agree that appropriate top- chaired by an independent director, should be desig- ics for board-shareowner communications include a nated to address these issues and report back to the range of issues involving governance topics and full board.

4 CII–NACD Task Force Report — Improving Board–Shareowner Communications Background

The Council and the NACD have longstand- agers at the expense of shareowners, and that ing commitments to improving corporate gov- this imbalance has contributed to the recent cor- ernance standards and practices and enhancing porate scandals. director accountability to shareowners. The Reforms enacted under the Sarbanes-Oxley Council has adopted policies on board-share- Act of 2002 and by the SEC and the stock ex- owner communications (see Appendix 1), and changes have tried to bolster the role of the the NACD has published articles and reports board in relationship to management and that are consistent with these policies. The two strengthen the accountability of boards and organizations formed this Task Force in the af- management to shareowners. In addition to fo- termath of major corporate scandals that high- cusing on issues such as appropriate board and lighted the dysfunction of board-shareowner committee structures and duties, several re- communications—making both directors and forms have addressed concerns that in some shareowners more conscious of this issue. cases directors may have become too isolated from shareowners. A variety of new rules and OVERVIEW regulations designed to bridge this gap are now in place: The need for shareowners to communicate with directors is a byproduct of our times. Un- • The Sarbanes-Oxley Act of 2002 requires like the earliest corporations, where managers, audit committees to establish procedures for owners, and directors were one and the same, the receipt, retention, and treatment of com- the modern publicly owned corporation is a plaints received by companies regarding in- compact between shareowners, who elect di- ternal accounting controls or auditing mat- rectors, and directors, who are charged with ters and for the confidential, anonymous sub- oversight of management on the shareowners’ mission by employees of concerns regarding behalf. questionable accounting or auditing matters. In recent years, there has been a breakdown • Recently revised NYSE listing standards re- in the relationships connecting shareowners, di- quire that boards have all-independent nom- rectors, and managers. Some companies do inating committees and that non-manage- focus on this connection, developing policies ment directors meet at regularly scheduled that encourage board-shareowner communica- executive sessions without management. tions (see Box 1 on pp. 6–7 and Box 2 on p. 8). NYSE-listed companies must also disclose a Nonetheless, many shareowners believe that method for interested parties, including there is an imbalance of power favoring man- shareowners, to communicate directly with

CII–NACD Task Force Report — Improving Board–Shareowner Communications 5 Background

the presiding director of the executive ses- • The SEC approved new proxy statement dis- sions or with the non-management directors closure rules addressing shareowner-director as a group. Companies may use the same communications and the director nomination procedures established to comply with Sar- process. Companies must disclose whether banes-Oxley requirements to satisfy the or not their boards have processes for share- NYSE requirements. owners to send communications to the

BOX 1: RESOLUTION OF THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE COMMITTEE OF ACXIOM CORPORATION

The board of directors of Acxiom WHEREAS, the Board has deter- anonymous communications may be Corporation, on the recommendation mined that the most effective way to made. [The company’s internal audit of its Corporate Governance Commit- establish such a means of communi- firm], through one or more designat- tee, on May 21, 2003, adopted the cation is to retain as its agent for re- ed employees, will receive all such following resolution: ceipt of and response to such com- communications and will make regu- munications ..., the Company’s inter- lar reports thereon to the Board’s Cor- “WHEREAS, the Board of Directors nal audit firm, which has also been porate Governance Committee or has determined that it is in the best retained as the agent of the Board of Audit Committee, as appropriate. If interests of the Company’s sharehold- Directors’ Audit Committee with re- the nature of any communication is ers to provide a mechanism whereby gard to that committee’s compliance deemed by [the audit firm] to be both the shareholders may communicate with the requirements of the Sar- urgent and material, or if immediate with the Board, and particularly with banes-Oxley Act of 2002 relating to action by the Board or a committee the non-management members of the receipt, retention, and treatment thereof is required for any reason, a the Board, with regard to any con- of complaints regarding accounting, report will be made by [the audit firm] cerns that the shareholders may have internal accounting controls, and au- as quickly as possible to the Chair- concerning the Company; diting matters, and the confidential, man of the Corporate Governance anonymous submission by associates Committee and/or the Chairman of WHEREAS, the Board believes that of concerns regarding questionable the Audit Committee, as appropriate, the creation of a means of communi- accounting or auditing matters; and or to the Company’s Internal Audit cation between shareholders and the Committee, who shall in turn prompt- non-management directors would ben- WHEREAS, under the proposal sub- ly notify the appropriate committee efit the Company through constructive mitted by [the Company’s internal chairman. The committee chairman discussions of perspectives, enhanced audit firm], a toll-free telephone num- shall then determine whether a spe- understanding, valuable feedback and ber for both domestic and internation- cial meeting of the committee is re- the fostering of meaningful links be- al calls will be established, together quired. Otherwise, a report will be tween directors and the shareholders with a mailing address and an e-mail made by [the internal audit firm] at by whom they are elected; address, whereby confidential and/or the next quarterly meeting of the

6 CII–NACD Task Force Report — Improving Board–Shareowner Communications Background

board. Any company without a communica- Companies must also describe their policies, tions process must provide a statement ex- if any, regarding directors’ attendance at an- plaining why the board believes that it is not nual meetings. appropriate to have such a process. Compa- nies with formal processes must describe The Task Force agrees there is a need for im- how shareowners may send communications proved communications between boards and to the board and, if applicable, to specified owners and that companies should have policies directors. If communications are not sent di- and processes in place to facilitate direct com- rectly to directors, companies must describe munications, including in-person meetings and their processes for determining which com- written correspondence, between shareowners munications will be forwarded to directors. and boards. Boards want shareowners to

BOX 1 continued from page 6 appropriate committees), and to management directors or to the NOW, THEREFORE, BE IT RE- the full Board if necessary, Company’s Internal Audit Commit- SOLVED, that the Board hereby regarding any communications re- tee, who shall in turn promptly no- approves the retention of [the in- ceived during the time intervening tify the non-management direc- ternal audit firm], in accordance between meetings. [The internal tors (as soon as possible if ur- with the proposal described audit firm] shall, on behalf of the gent, or at the next quarterly above, as its agent to receive and Board, retain records of all com- meeting if non-urgent). The direc- respond to communications from munications of shareholders, to- tors will then determine whether shareholders to the Board of Di- gether with any subsequent docu- the subject matter of the meeting rectors or to the non-management mentation relating thereto; and is a proper subject to be ad- members of the Board, which dressed by the Board, and if so, communications may be made on WHEREAS, under the proposal whether the severity of the mat- a confidential and anonymous submitted by [the company’s inter is such that a meeting is war- basis if desired, relating to any ternal audit firm], upon receipt of ranted. The non-management di- matter concerning the Company, a request by a shareholder for a rectors may delegate this function and hereby authorizes and directs meeting with the non-manage- to the Chairman of the appropri- management of the Company to ment directors, a prompt re- ate committee (Corporate Gover- establish a web page on its exter- sponse will be transmitted to the nance or Audit), which is com- nal website as soon as practicable shareholder by [the internal audit prised solely of non-management which lists the [internal audit firm] on behalf of the directors, directors. The results of the direc- firm’s] contact information (toll- advising the shareholder that the tors’ decision regarding the re- free telephone numbers, mailing directors will take the meeting request for a meeting will then be address and e-mail address) for quest under advisement. Such re- promptly communicated by [the Board communications and to quests will be transmitted by [the internal audit firm] to the share- publish such contact information internal audit firm] to the non- holder. in its 2003 proxy statement.”

CII–NACD Task Force Report — Improving Board–Shareowner Communications 7 Background

BOX 2: communicate with them; this message came BOARD-SHAREOWNER through loud and clear from the research the COMMUNICATIONS AT PFIZER INC.— Task Force conducted. (See Appendices 2 and A PROFILE 3.) And shareowners want to communicate with boards. PFIZER SHAREOWNER COMMUNICATIONS Unfortunately, boards and shareowners face Information concerning communication with Pfizer direc- barriers to communicating with each other. tors is available in our proxy statement under the heading: First, there are regulatory considerations that Communications with Directors, as well as on the Pfiz- may impact communications. Second, there are er.com Corporate Governance website at concerns that directors would be overwhelmed www.pfizer.com/For Investors/Corporate Governance. by shareowner communications. Compounding While we do not have a formal, written policy on share- the problem is the fact that boards often lack holder communications, our Corporate Governance Princi- clear examples of how to achieve effective ples state that the Chairman and CEO is responsible for establishing effective communications with the Compa- board-shareowner communications. ny’s stakeholders groups, including shareholders. It is the The goal of the Council-NACD Task Force policy of the company that management speaks for the was to investigate the current barriers to com- Company. This policy does not preclude outside directors munication, evaluate how some companies and from meeting with shareholders. directors have overcome them, and issue rec- In addition, it has been Company practice for many years ommendations or “best practices” based on its to respond to shareholder letters and telephone inquiries, findings. Since neither the SEC nor the NYSE as well as shareholder comments on proxy cards. When disclosure requirements provide specific guid- shareholder proposals are received, every effort is made to encourage a dialogue with the shareholder proponent, ance or suggest best practices, this report is in- so that there is a better understanding of issues impact- tended to provide boards with some concrete ing both sides. The Corporate Governance Committee is suggestions for conducting their shareowner notified of all shareholder proposals, as well as dialogue communications. It is hoped that this report will with proponents. be helpful to both directors and shareowners Going forward, going forward. 1. In addition to whatever e-mail reading directors engage in directly, we will brief the board through the Corpo- CASE FOR rate Governance Committee on a quarterly basis concerning the general nature and number of shareholder BOARD-SHAREOWNER communications. COMMUNICATIONS 2. We will forward all substantive mail sent to us to the directors, but will not send solicitation, crank mail or Since directors are the elected representatives mail from vendors. of shareowners and charged with the significant 3. We will forward all letters that institutional investors responsibilities of overseeing management, cor- ask us to send to directors and will send substantive communications to the Chair of the Corporate Gover- porate strategy, and performance, the Task Force nance Committee. believes it is appropriate for shareowners to have an opportunity to communicate non-trivial and Source: Rosemary Kenney, Project Manager, Corporate important concerns directly with the board. Governance, in an interview conducted by NACD’s Debo- rah Davidson on October 17, 2003.

8 CII–NACD Task Force Report — Improving Board–Shareowner Communications Background

Effective board-shareowner communication Regulation FD is not intended to prohibit benefits both parties. It ensures that significant companies from engaging in private, one-on- investor concerns are heard by directors and in- one meetings with shareowners. The rule, de- creases the accountability of directors. It gives signed to promote full and fair disclosure of in- boards a mechanism to receive the views and formation by issuers, and to clarify and enhance information from owners of the company, who existing prohibitions against insider trading,1 is offer a unique perspective that may or may not simply intended to ensure that all investors— be the same as that of management. large and small—have access at the same time The Task Force believes one of the more tan- to material information about companies. gible benefits of improved board-shareowner Regulation FD violations can occur in any communication may be that investors’ use of medium. Most of the SEC’s first enforcement shareowner proposals—long considered one of actions over alleged violations have involved the most direct ways to communicate concerns management telephone conversations with se- to and start dialogues with boards—may decline lected analysts or portfolio managers. To date, in the future as shareowners become more com- only two involved disclosures made by a senior fortable, and eventually satisfied, with alternate executive during meetings with groups of in- methods of communicating with directors. vestors. Education is the best defense against Regu- CURRENT IMPEDIMENTS TO lation FD violations. To ensure that directors BOARD-SHAREOWNER fully understand Regulation FD, boards should COMMUNICATIONS have access to counsel to provide information and guidance on Regulation FD issues. Boards Regulation FD should decide whether counsel should attend any shareowner-board meetings and assist with Concerns about Regulation Fair Disclosure written communications, and whether the board (Regulation FD)—the SEC’s regulation ban- wishes to hire its own outside counsel to assist ning companies from selectively disclosing ma- on Regulation FD issues. Shareowners should terial, non-public information to one investor or also inform themselves about ways to avoid in- selected groups of investors—have led some advertently raising Regulation FD concerns, companies to discourage certain types of com- such as the separation of corporate governance munications with shareowners. and trading operations, and—in the case of in- One reason for the concern is the lack of an dexed and other passive holdings—agreements authoritative and precise definition of “materi- to refrain from trading after the meeting. al,” though some disclosures or announcements, Task Force members generally believe that such as advance warnings of financial results or most board-shareowner communications, in- confirmation of previously disclosed informa- cluding phone conversations and in-person tion in the 10-Ks, 10-Qs, and proxy statements, meetings, would address corporate governance are generally considered material and require si- and other issues that would not be considered multaneous release to all investors. material, non-public information subject to

1 http://www.sec.gov/rules/final/33-7881.htm.

CII–NACD Task Force Report — Improving Board–Shareowner Communications 9 Background

Regulation FD. However, issues that may be in- Nonetheless, it is the sense of the Task Force tended as governance matters may be interpret- that board members should see all correspon- ed as financial performance matters. Therefore, dence addressed to them and be made aware of to help address board concerns with Regulation all other communications intended for them. FD, agendas outlining areas for discussion Although it can be useful to have a company of- should be developed for all in-person meetings. ficial or other party organize and summarize communications directed to board members, Proper Scope of Communications such a process should never function as a “screen” against direct communication. Clearly, not all topics are best addressed by To ensure that directors are not deprived of board-shareowner communications. There is a direct access to important shareowner concerns concern that board members, particular at larg- or suggestions, company officials or other third er companies, may be overwhelmed with the parties should only be charged with summariz- volume of correspondence from shareowners. ing and/or organizing communications. They For example, sometimes individual shareown- should have no discretion to decide what com- ers write letters about topics—such as a defec- munications are forwarded to board members. tive product or poor service—not related to Any summaries, along with all underlying com- board oversight. The Task Force agrees that cor- munications, should be promptly and regularly porate staff is most qualified to answer that kind forwarded to all directors. of correspondence.

10 CII–NACD Task Force Report — Improving Board–Shareowner Communications The Task Force’s Recommended Best Practices

1. Board-shareowner communications are Some companies send special newsletters best facilitated by ongoing communica- to their shareowners as well as posting them tions programs that include regular, com- on their websites. For example, on July 2, prehensive, and publicly available disclo- 2003, Universal Express (USXP) announced sures about important management and that CEO Richard Altomare would provide board issues. all shareowners with a monthly letter pub- Information about corporate perform- lished on USXP’s website. “In addition to ance, business strategy, and corporate gover- our press releases, which cover substantial nance policies should be on a company’s events, this monthly letter may assist our website, in an easily accessible and under- thousands of shareowners in better under- standable form—i.e., in plain sight and in standing the daily activities, and efforts actu- plain English. Having meaningful informa- ally going on but yet not significant enough tion readily available on the website and en- for a national press release,” said Altomare in suring transparent disclosures about corpo- the company’s announcement. rate financials, policies, and practices may mitigate the need for shareowners to commu- 2. Boards should provide detailed contact nicate with directors through other means, information for the corporate secretary including the submission of shareowner or other management designee and for at proxy resolutions.(See Box 3 on p. 12.) least one independent director. Posting shareowners’ questions (whether Although the full board is responsible for they arrive by phone, mail, or Internet) and board-shareowner communications, this ac- the company’s responses offers numerous cess might be provided most practically advantages. Including the most frequently by one or more designated independent asked questions (FAQs) can be a good way directors. to reduce the volume of correspondence to The Task Force agrees that the most ap- the board and management on issues of gen- propriate single contact for shareowners is eral interest. Furthermore, posting all non- the independent board chair, the lead inde- trivial questions (even if only one share- pendent director, the independent director owner asked) can help ensure a regular presiding over regular executive sessions of stream of information of potential interest to the board, or the independent chair of the shareowners. nominating/governance committee.

CII–NACD Task Force Report — Improving Board–Shareowner Communications 11 The Task Force’s Recommended Best Practices

Companies should also consider disclosing practical matter, unless and until boards have contact information for the independent their own staffs, the Task Force agrees that it chairs of the audit, compensation, and nomi- may be appropriate for a board to designate nating/ governance committees. one person, such as the corporate secretary, Shareowners want the ability to communi- head of investor relations, or independent cate with the board directly, and no intermedi- third party, to be responsible for initially re- ary should impede that communication. As a ceiving communications, summarizing them,

BOX 3: A BOARD-SHAREOWNER DIALOGUE: GENERAL ELECTRIC AND CONNECTICUT RETIREMENT PLANS AND TRUST FUNDS

In proxy season 2003, the Connecticut Retirement a non-management representative on an issue such Plans and Trusts Funds (CRPTF) filed a resolution as compensation, where independence is of the ut- submitted to General Electric (GE) regarding the sev- most importance. erance package provided to former chair and CEO John F. Welch, Jr. After corresponding with the GE The group spent several hours working through an board, CRPTF withdrew the resolution based on two agenda of compensation issues. One of the out- conditions: comes was a commitment by the company to me- • That the independent chair of the compensation morialize in GE’s compensation policy (Compensa- committee, Andrew C. Sigler, would meet to dis- tion Committee Key Practices) two settlements that cuss GE’s executive compensation policy with had been reached prior to the meeting with institu- CRPTF and six other institutional investors who tional investors in attendance. Such changes to the had submitted executive compensation resolu- policy included: tions to the company. • No longer using pension income as a factor in the • That CRPTF and GE would continue their discus- evaluation of executives’ performance. sions on broader corporate governance issues in • Using the same interest rates for salary deferrals the future. for all participants in the plans. • Explaining factors used in evaluating executive Attendees at the March 13, 2003, meeting in New compensation awards as well as severance pack- York City consisted of representatives of CRPTF, the ages—important clarifications considering that GE Teamster’s Pension Fund, the Communication Work- does not have employment contracts. ers’ Pension Fund, the Amalgamated Longview Fund, and the AFL-CIO staff Pension Fund. By teleconfer- Shortly after the meeting, the company also agreed ence, CalPERS and Responsible Wealth Trust partici- to a resolution tying compensation to performance. pated, along with a representative from the Council The company and shareholders agreed to meet of Institutional Investors. again and to continue their dialogue on compensation issues. The meeting was chaired by Mr. Sigler. Connecticut Treasurer Denise L. Nappier opened the meeting by Source: Connecticut Retirement Plans and Trusts expressing the group’s appreciation for meeting with Funds

12 CII–NACD Task Force Report — Improving Board–Shareowner Communications The Task Force’s Recommended Best Practices

and then promptly and regularly forwarding 3. Appropriate topics for board-shareowner summaries and the communications to the communication should be disclosed to board. As a general matter, however, corre- shareowners and should include major, spondence with directors addressed to the fundamental issues involving corporate company’s offices should be forwarded im- strategy as well as governance topics. mediately to the addressee, with copies re- The Task Force agrees that corporate gov- tained for the company’s records and for any ernance topics and issues involving corporate summarizing or other review by staff or strategy (including mergers, acquisitions, di- other directors. The Task Force also recog- vestitures, capitalization) are appropriate for nizes that shareholders will correspond di- board-shareowner communications. rectly with board members and companies Example: Campbell Soup’s Corporate Gov- should not place obstacles in the way of that ernance Guidelines state, “ Any person who direct correspondence. has a concern about Campbell’s governance, However, summarizing/organizing mech- corporate conduct, business ethics or finan- anisms are inappropriate in certain cases. The cial practices may communicate that con- Task Force believes that shareowners or oth- cern to the Board of Directors. Concerns ers should have a direct route to the board to may be submitted in writing to the Chairman discuss any important issue of governance, of the Board or to the non-management di- especially company or management prac- rectors as a group in care of the Office of the tices, policies, or activities that are possibly Corporate Secretary at the Company’s head- questionable, unethical, or illegal. In these quarters, or by email to directors@camp- cases, shareowners have an especially urgent bellsoup.com. Concerns may also be com- need to contact board members directly and municated to the Board by calling the fol- need to be told how they can do this. lowing toll-free Hotline telephone number in If company employees or other parties the U.S. and Canada: 1-800-210-2173. To are responsible for organizing, summarizing, place toll-free calls from other countries in and/or forwarding communications to direc- which the Company has operations, please tors, the company should disclose: (1) who see the instructions listed below. Any con- does it, (2) how the summarized information cern relating to accounting, internal account- and underlying communications are for- ing controls or auditing matters will be re- warded to the appropriate directors and/or ferred both to the Chairman and to the Chair the full board, and (3) how often summaries of the Audit Committee.” and actual communications are forwarded to directors. Directors should be made aware of all For one example, see Box 1 on pp. 6-7, de- communications directed to them. Most scribing the policy of Acxiom Corporation. communications will fall into three categories:

CII–NACD Task Force Report — Improving Board–Shareowner Communications 13 The Task Force’s Recommended Best Practices

• Issues management should generally • Issues either management or the board handle, such as: could handle, such as: — Individual employee and retiree com- — Accounting and auditing policy issues. plaints about their compensation (e.g., — Corporate strategy (mergers, acquisi- retirement benefits). tions, divestitures, or capitalization is- — Customer complaints about products sues). or services. — Disclosure issues. — Shareowner complaints about the processing of payments the company Though some subjects may be appropri- makes to them (e.g., failure to receive ately handled by either management or di- dividend checks on time). rectors, if management does not respond in a satisfactory way to shareowner concerns or However, the Task Force recognizes there if shareowners express an interest in dis- may be occasional circumstances when cussing these issues with directors and not items that appear to fall in these categories management, shareowners should be able to are appropriate for board attention. For ex- contact directors, and the directors should be ample, directors should receive complaints prepared to respond. about product or service problems that could lead to product liability or similar tort suits, 4. Boards should develop, adopt, and dis- and about extraordinary compensation paid close policies covering all forms of com- to particular individuals. munication. A board-shareowner policy should cover • Issues boards should handle, such as: all types of communication—including in- — Alleged or actual legal violations person meetings, telephone, e-mail and other (whistleblower issues). electronic communications and other written — Company performance, including pro- correspondence. It should ensure that share- longed poor performance relative to its owners know how to contact independent di- peer group or broad market indexes. rectors. Furthermore, it should provide assur- — Executive and director compensation. ances that directors are informed of the con- — Board policies and procedures. tent of shareowner communications and will — Board structure, size, and tenure make a good-faith effort to respond to all di- changes. rect communications from shareowners. — Director nominations (suggesting There may well be times and issues when the qualified nominees). most appropriate response is “We cannot re- — Director selection and evaluation (sug- spond to your question or issue at this time gesting criteria for individuals and because of the following...” However, a board). good-faith effort implies that the board will — Shareowner proposals, including those use this response only on an exceptional addressing corporate governance issues basis, and will provide any necessary follow- and corporate responsibility issues. up in a timely fashion.

14 CII–NACD Task Force Report — Improving Board–Shareowner Communications The Task Force’s Recommended Best Practices

A board-shareowner policy should in- • If a shareowner resolution wins the sup- clude such specifics as guidelines for the report of a significant number of votes cast, even ceipt, content, and mode of communications. if less than a majority of the votes cast, the The Task Force recommends the follow- board or appropriate committee of the board ing best practices for each form of commu- should meet with the proponent(s), whether or nication. not the board decides to adopt the proposal. • The board should provide a written ex- In-person meetings: planation of any decision not to adopt a share- annual shareowners’ meeting owner-recommended action that wins the sup- • All directors should attend annual share- port of a significant number of votes cast, even owner meetings (absent emergencies) in order if less than a majority of the votes cast. Such to be available to meet and communicate with disclosure, including a description of the shareowners in person at least once a year. process used to make the determination, should Companies should also consider holding open be promptly provided to shareowners and inter- meetings in connection with the annual meet- ested parties, disclosed on the company’s web- ings (before or after) where shareowners can site, and also included in the proxy materials ask questions and communicate their concerns for the following year. to the independent directors. Other in-person meetings Example: The board of Colgate-Palmolive • Boards should be willing to meet with adopted a resolution stating that “each mem- shareowners, and companies’ communications ber of the Board of Directors of the Compa- policies should disclose the ground rules under ny should attend meetings of stockholders of which directors would be willing to meet with the Company, unless extraordinary circum- shareowners in closed sessions. stances prevent his or her attendance.” • Boards should respond in writing to all • The lead director or independent board requests for meetings, making a good-faith ef- chair and chairs of the compensation, nominat- fort to accommodate legitimate and important ing, governance, and audit committees should requests. Boards may either accept or decline be available to take questions from shareowners requests for such meetings in order to limit the at the annual shareowners’ meeting.2 Share- number of such meetings to a reasonable level owners should be given an opportunity to sub- and prioritize acceptances based on the interests mit in advance written questions that they wish of all shareowners. directors to address at the shareowners’ meet- • Boards should determine whether outside ing. Shareowners should not be limited to ask- counsel should be present at meetings with ing pre-approved questions of directors at annu- shareowners to monitor compliance with Regu- al shareowner meetings. lation FD.

2 A note for directors from Warren L. Batts, Task Force Co-Chairman: Directors can answer these questions and any other questions raised at the meeting at their discretion. To the extent possible, directors should speak with a unified voice. This does not mean that directors should script their responses. However, as a best practice, directors should designate in advance who will respond to what questions on what topics.

CII–NACD Task Force Report — Improving Board–Shareowner Communications 15 The Task Force’s Recommended Best Practices

• Boards should have the ability and re- Electronic communication sources to hire independent experts, including • Boards should provide e-mail addresses outside counsel, to assist with in-person meet- for shareowners’ use to communicate with in- ings, when deemed appropriate. dependent board members as a whole and with each committee chair individually. Example: Sprint’s Corporate Governance Guidelines state: “The Board and each com- Example: Pfizer’s website, under “For In- mittee, as well as the Lead Independent Di- vestors,” includes the following: “The rector on behalf of the non-employee direc- Chairs of our Audit, Compensation, and tors as a group, have the authority, to engage Corporate Governance Committees rotate the services of advisors, at Sprint’s expense, responsibility for chairing the executive to assist in the discharge of their duties.” sessions of our outside (non-management) directors. You may communicate with the Telephone, webcasting, or Chair of any of these committees by send- other live audio communication ing an e-mail to [email protected], • Companies should broadcast their annual [email protected], or corpgovchair@ meetings via webcast for shareowners who can- pfizer.com, or with our outside directors not attend in person, and, where possible, should as a group by sending an e-mail to permit shareowners to participate via webcast. [email protected].” Such webcasts should supplement, not replace, (See Box 2 on p. 8 for more details on the the in-person meeting. policy of Pfizer.) Example: Fannie Mae webcasts its annual • The e-mail may be staffed by a corporate meeting. Shareowners are encouraged to for- employee or a person retained by the board for ward questions and comments to the board of this purpose, but each independent director directors. Shareowners are able to vote by tele- should have direct access to receive all incom- phone or on the Internet prior to the meeting. ing e-mails. • In addition to participating in the compa- • In addition to direct access to all elec- ny’s webcast meetings, independent directors tronic communications, independent directors should be given a summary of issues raised by should be given a summary of issues raised by shareowners in the webcasts. shareowners by e-mail.

16 CII–NACD Task Force Report — Improving Board–Shareowner Communications The Task Force’s Recommended Best Practices

Written (non-electronic) communication tee of the Board of Directors, who will com- • Boards should supply a mailing address municate with other directors as appropriate.” to which shareowners may send correspondence intended for board members. 5. Boards should be committed to communications policies and should ensure that poli- Example: El Paso’s Corporate Governance cies and practices are up to date and effec- Guidelines state: “Stockholders may con- tive. tact non-management members of the Board-shareowner communications should Board by sending written correspondence be considered an ongoing process that should to the director to the following address: be continuously reviewed and updated to max- ______, Director imize effectiveness. Boards must be commit- c/o David L. Siddall ted to the communications process. Without a Corporate Secretary serious board commitment to ensuring that P.O. Box 2511 policies are observed and updated on an ongo- Houston, TX 77252 ing basis, the board-shareowner communica- The Corporate Secretary will forward all tions process may fail. Responsibility for such correspondence to the appropriate board-shareowner communications should be Board member or members.” delegated to a specific committee, such as the nominating/governance committee, with an • In addition to receiving copies of all independent chair. The chair of that designat- written communications, independent direc- ed committee should in turn have the respon- tors should be given a summary of issues sibility to report back to the full board on raised by shareowners in any medium, includ- board-shareowner communication issues and ing comments written on annual proxy ballots. policies. • Boards should disclose what procedures are followed concerning this correspondence and whether management opens or is given CONCLUSION copies or summaries of all correspondence. Board-shareowner communications will con- Example: Sealed Air provides an address to tinue to be a focus for reforms in coming months send communications to non-management and years. Companies that improve their commu- directors. The communications are routed nications policies now on a voluntary basis will through the corporate secretary’s office, but be able to accommodate any new regulations or Sealed Air’s website, under “Corporate listing standards that may arise. More important, Governance,” states that: “correspondence such companies will strengthen their long-term will be forwarded to the Chair of the Nomi- financial performance by not only retaining and nating and Corporate Governance Commit- attracting investors, but also learning from them.

CII–NACD Task Force Report — Improving Board–Shareowner Communications 17 APPENDICES

Appendix 1: The Council of Institutional Investors Policies Relating to Board-Shareowner Communications

Appendix 2: American Society of Corporate Secretaries Survey on Shareowner-Director Communication

Appendix 3: NACD Online Survey Results

18 CII–NACD Task Force Report — Improving Board–Shareowner Communications APPENDIX 1: THE COUNCIL OF INSTITUTIONAL INVESTORS POLICIES RELATING TO DIRECTOR-SHAREOWNER COMMUNICATIONS

The Council believes shareowners should have long-term investor or group of long-term investors meaningful ability to participate in the major fun- owning in aggregate at least 5 percent of a compa- damental decisions that affect corporate viability ny’s voting stock to nominate less than a majority and meaningful opportunities to suggest or nomi- of the directors. Eligible investors must have nate director candidates and to suggest processes owned the stock for at least three years. Company and criteria for director selection and evaluation. proxy materials and related mailings should pro- Shareowners should be allowed to vote on any vide equal space and equal treatment of nomina- major change in board size. tions presented by qualifying investors

BOARD ACCOUNTABILITY TO SHAREOWNER MEETINGS SHAREOWNERS Corporations should make shareowners’ ex- Majority shareowner votes. Boards should pense and convenience primary criteria when se- take actions recommended in shareowner propos- lecting the time and location of shareowner als that receive a majority of votes cast for and meetings. against. If shareowner approval is required for the Appropriate notice of shareowner meetings, action, the board should submit the proposal to a including notice concerning any change in meet- binding vote at the next shareowner meeting ing date, time, place or shareowner action, should Interaction with shareowners. Directors be given to shareowners in a manner and within should respond to communications from share- time frames that will ensure that shareowners owners and should seek shareowner views on im- have a reasonable opportunity to exercise their portant governance, management and perform- franchise. ance matters. All directors should attend the annu- Polls should remain open at shareowner meet- al shareowners’ meeting and be available, when ings until all agenda items have been discussed and requested by the chair, to answer shareowner shareowners have had an opportunity to ask and re- questions. ceive answers to questions concerning them. Shareowner-director communication. All Companies should not adjourn a meeting for companies should establish a mechanism by the purpose of soliciting more votes to enable which shareowners with non-trivial concerns management to prevail on a voting item. Extend- could communicate directly with the independent ing a meeting should only be done for compelling directors. At a minimum, there should be an open reasons such as vote fraud, problems with the vot- meeting in connection with the company’s annual ing process or lack of a quorum. meeting (before or after) in which shareowners Companies should hold shareowner meetings could ask questions and communicate their con- by remote communication (so-called electronic or cerns to the independent directors. “cyber” meetings) only as a supplement to tradi- Access to the proxy. Companies should pro- tional in-person shareowner meetings, not as a vide access to management proxy materials for a substitute.

CII–NACD Task Force Report — Improving Board–Shareowner Communications 19 APPENDIX 2: AMERICAN SOCIETY OF CORPORATE SECRETARIES SURVEY ON SHAREHOLDER-DIRECTOR COMMUNICATION

The Council-NACD Task Force sent a survey “We set aside two days per quarter specifical- on director-shareholder communications to mem- ly to [have shareholders] meet with manage- bers of the American Society of Corporate Secre- ment (group meetings). We occasionally make taries on Aug. 7, 2003, requesting that comments management available at other times depend- be submitted by Sept. 30. The 82 responses re- ing on the circumstances.” ceived are summarized below. Interesting exam- “Hold regular meetings of major shareholders ples of individual company practices or policies for them to address concerns.” are included in italics. “Try to be proactive by making committee Who is responsible for processing shareholder chairs available to shareholders (e.g., attend communications? institutional events).” 62% Investor Relations “Parties may contact the presiding director 39% Corporate Secretary directly through the address listed in the 9% Chief Financial Officer proxy. Requests coming from alternative av- 4% General Counsel/Legal enues are channeled through the corporate 2% Corporate Governance secretary’s office.” What is the process for responding to share- “Individual or shareholder requests for meet- holder communications? ings with the board are directed to the office of the corporate secretary for handling. The cor- How are shareholder requests to meet with porate secretary coordinates the handling of company officials handled? such matters with the presiding director/com- How are requests to meet with independent di- mittee chair. Individual board members may, rectors/board committees handled? from time to time, meet or otherwise commu- Each surveyed company said it tried to respond nicate with various constituencies. Board to every shareowner communication in a timely members will generally speak with individuals fashion. In most cases, shareowner inquiries are or shareholders only with the knowledge of screened by the corporate secretary or the investor management.” relations department and are either answered or Are procedures for dealing with shareholder forwarded to the relevant company official or de- communications formalized? partment. A significant majority (71%) handle share- Requests to meet with company officials or di- holder communications through verbal or more rectors are similarly screened. In most companies, informal channels. a meeting is arranged only if the request comes from a large shareholder. Several companies for- “Process, though informal, is mentioned in the ward requests to the officials or directors and leave proxy statement.” it to them to contact the shareholder if they wish.

20 CII–NACD Task Force Report — Improving Board–Shareowner Communications Appendix 2

What procedural changes have been made Is there a process to deal with shareholder- since January 2000 to handle requests? suggested candidates for the board? Most companies (74%) said they have made no 69% Yes changes. A few companies have made adjustments 31% No to comply with Regulation FD, such as drafting formal disclosure policies and requiring corporate Most companies with formal processes for- relations or counsel to be present at all meetings ward the suggested candidates to the nominating with shareowners. and corporate governance committee, which then reviews, analyzes, and considers the candidate for Are communications from institutional in- nomination to the board of directors. vestors and individual shareowners processed “All shareholder-suggested candidates are re- similarly? viewed by the board affairs committee against 73% Yes written guidelines for selection of non-employ- 27% No ee directors, which have been approved by the board. Suggested candidates meeting the In each case where shareholder communica- guidelines are considered for the nomination tions were handled differently, communications slate as a director at the next annual meeting. were processed by different company depart- Those determined by the board affairs commitments. In some cases, institutions were given a tee or the board not to meet the guidelines are more direct route to senior company management provided a written response indicating that de- than individuals. termination.” Does the company website include: Are directors willing and available to meet 39% FAQ (frequently asked questions) with shareholders? 0% Shareowner/Director/Executive 99% Yes Chat Rooms 93% At annual meeting 5% Direct Board Member E-mail Addresses 22% Any other meeting 49% Specially requested circumstances Are directors informed of all communications and meeting requests from shareholders? Have any directors actually met with share- 35% Yes holders? 65% No 68% Yes “Typically by VPs of Investor Relations, as ap- 32% No propriate, based on the subject matter. Trans- fer agent provides aggregate information and Most meetings of shareowners and directors trends.” take place at the annual meeting or in informal sessions after the annual meeting. Several companies “Institutional shareholders—yes. Individual limit contact with directors to institutional in- shareholders—depends on if it is a substantive vestors or shareowners with important topics to issue.” discuss. “Directors are generally advised of all substantive communications from shareholders.”

CII–NACD Task Force Report — Improving Board–Shareowner Communications 21 Appendix 2

Do directors have concerns about Regulation “Shareholders should communicate with man- FD and worry about liability relating to meet- agement unless the contact is to report a viola- ings with shareholders? tion (e.g., Sarbanes-Oxley).” If so, briefly describe how the company deals “If management is doing its job, there should with these concerns. be almost no requests for meetings with direc- Each company surveyed has taken steps to en- tors.” sure FD compliance (education of management “All companies are struggling to determine and directors, coordination with general counsel, the most effective way to increase communica- constant reminders, etc.). About half of the com- tion with the board. Many inquiries directed to panies continue to express concern over FD, while the board are customer service complaints or half feel it is not a problem. feedback not specific to shareholder concerns. The company’s current plan is to set up an e- Suggestions for improving shareowner-direc- mail box with an appropriate filter to ensure tor communications. the nature of inquiries is specific to sharehold- “Institutional investors could be asked to ap- er concerns.” pear at board meetings to discuss their percep- “Our shareholders can access the board of di- tion of the company, its operations and man- rectors by e-mail and voice mail that is moni- agement.” tored on a daily basis.” “There must be a mechanism to filter out the “We would take any legitimate shareholder re- routine (e.g. where’s my dividend?) from the quest seriously and handle with integrity. We important. Most shareholder issues can be han- do not need to design, install and document a dled by the company staff. Directors would governance process for something that simple need additional personnel to filter out and re- business principles and common sense/com- spond to the real issues. Maybe a company mon courtesy should address.” website set up by categories (executive comp, etc.) with a summary of company policy could “Provide channels—Internet or correspon- be created.” dence—for direct communication, but limit messages so as not to overburden directors. “Company officials should receive a safe har- May require a company official to filter mes- bor from FD when conducting meetings in a sages so as to limit spam, name-calling, trite or town hall setting with online webcast.” inappropriate comments.” “Large companies could develop staff trained “Funnel through one individual all sharehold- in FD and PR to inform shareholders fairly.” er concerns.” “When making a recommendation, consider “Give Sarbanes-Oxley and its progeny a the impact of e-mail and the potential for spe- chance to work! There is no need for drastic cial interest groups to flood directors with cor- changes in the current rules. Corporate boards respondence on the same issue.” are truly stepping up their independence and “Provide a link on each company website to accountability. The positive effects will become send an e-mail to directors.” clear but it will take a little time.” “Common sense—talk to your owners!” “Communications should be one-way from shareholders to directors only.”

22 CII–NACD Task Force Report — Improving Board–Shareowner Communications APPENDIX 3: NACD ONLINE SURVEY RESULTS

The NACD conducted an online survey of per- How would you describe your board’s rela- sons serving on the boards of public companies, tionship with the company’s individual in- asking them to answer a number of questions vestors? about board-shareholder communication. As of 7% Excellent January 2, 2004, 42 directors had responded. Fol- 26% Very Good lowing are the results: 57% Satisfactory 10% Poor Please characterize: What is your view of the SEC’s proposed rule Your board’s approach to communications to require more disclosures about how board with shareholders, including long-term insti- governance/nominating committees operate, tutional investors: and how to contact directors? 19% Passive 14% Excellent Idea 36% Neutral 31% Good Idea 38% Pro-active 43% Not Sure 7% Adversarial 12% Poor Idea

Your long-term institutional investors’ ap- Under what circumstances do you believe proach to communications with your board: shareholders should amend bylaws to enable 19% Passive direct election of directors (bypassing the 38% Neutral nominating committee)? 40% Pro-active 21% Under any circumstances 2% Adversarial 52% When directors are not disclosing nomination process and/or where there How would you describe your board’s rela- is evidence that directors are ignoring tionship with the company’s long-term institu- shareholder requests tional investors? 26% Under no circumstances 7% Excellent 40% Very Good 50% Satisfactory 2% Poor

CII–NACD Task Force Report — Improving Board–Shareowner Communications 23 Acknowledgments

The Task Force was aided by and extends its Task Force Staff Assistance thanks to the many persons who contributed their Tom Brier, Deputy Director for Corporate Governance, thoughts and efforts to this report. Pennsylvania State Employees’ Retirement System Kay Evans, Executive Director, Maine State Retirement Members of the Task Force Advisory Board System James E. Heard, CEO,* Institutional Shareholder Margaret M. Foran, Esq., Vice President, Corporate Services Governance, and Corporate Secretary, Pfizer Inc. Nell Minow, Editor, The Corporate Library Janice Hester-Amey, Principal Investment Officer, Cali- Edward V. Regan, President, Baruch College fornia State Teachers’ Retirement System Mark C. Hill, Senior Vice President, Corporate Secre- Corporate Representatives tary, and General Counsel, Radio Shack Corp. Joyce P. Haag, Assistant General Counsel, East- Mike McCauley, Director of Investment Services, State man Kodak Company Board of Administration of Florida Robert B. Lamm, Corporate Secretary and Direc- Meredith Miller, Assistant Treasurer of Policy, Con- tor of Corporate Governance, Computer As- necticut Retirement Plans and Trust Funds sociates International, Inc. Elizabeth D. Mozley, Corporate Affairs Manager, State Mark Preisinger, Director, Shareowner Affairs, Board of Administration of Florida Coca-Cola Company Michael Musuraca, Trustee, New York City Employees’ Retirement System Shareowner Representatives Ken Sylvester, Director of Pension Policy, Office of the Alan Cleveland, Legal Counsel, New Hampshire Comptroller, City of New York Retirement System Bruce Kallos, Administrator, Arlington County Council and NACD Staff Assistance Employees Retirement System Peg O’Hara, Consultant, Council of Institutional In- Ted White, Director of Corporate Governance, vestors California Public Employees’ Retirement Michael McCartin, Analyst, Council of Institutional In- System vestors Jennifer O’Dell, Corporate Affairs Analyst, Inter- Alexandra R. Lajoux, Senior Research Analyst, Nation- national Brotherhood of Teamsters al Association of Corporate Directors Sheila Morgan-Johnson, Chief Investment Offi- Deborah J. Davidson, Senior Editor, National Associa- cer, District of Columbia Retirement Board tion of Corporate Directors Linda Kimball, Manager of Investment Responsi- Mary A. Graham, Designer, National Association of bility, Stanford Management Co. Corporate Directors

Legal Assistance American Society of Corporate Secretaries Andrew Entwistle, Entwistle & Cappucci LLP David W. Smith, President – for the Society’s outstand- ing research contributions.

* Mr. Heard was CEO during the Task Force’s deliberations. Effective March 1, 2004, he is Vice-Chairman.

24 CII–NACD Task Force Report — Improving Board–Shareowner Communications