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 com- munication 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 re- search 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 strate- gy, 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 communica- tion 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-