As mentioned above, there are very strict rules regarding the relationship between the board and shareholders. It is necessary to better understand this relationship to ensure that shareholders feel heard, which is one of the best ways to ensure that there are no activist shareholders trying to win a board seat. Additionally, a more open relationship with shareholders will also speak volumes in regards to board directors maintaining their seats and the investors feeling confident in the board.
At the same time, good corporate governance is the backbone of a successful board and embedded in that is managing the shareholder relationship. Keep a healthy relationship with shareholders is imperative to ensure the longstanding position of the board and to avoid shareholder activism. To better understand how to build the framework for that relationship, it is important to know how corporate governance also applies to relationships outside of the boardroom.
A healthy relationship with shareholders is built off of strong communication. The relationship between the board and shareholders is a tightrope walk and understanding how to properly communicate with shareholders is the way to keep that rope taut. This starts with a clear agenda and ends with accurate meeting minutes, however, what happens in between is what bolsters this relationship.
Transparency is also the backbone of a healthy relationship with shareholders. The Corporate Governance Reform and Transparency Act of 2017 was put into effect to increase transparency in the shareholder proxy systems. This law put into effect by the SEC helps to create a framework to disclose potential conflicts of interest and codes of ethics within the boardroom. Understanding the ins and outs of this law will better allow boards to understand the shareholder relationship and their role in maintaining it.
To understand how to handle shareholder activism, it is important for the board of directors to understand what motives an activist shareholder and to have the ability to fully trace back to the catalyst of the situation: essentially, what caused the shareholder to become upset at the actions of the board. Within the realm of shareholder activism, there are always going to be some historical trends that can provide the board with a framework of understanding to the why and what behind activist shareholders. Additionally, it is important for the board to create a plan for an activist shareholder to secure board seats and reach a successful mediation of what the issue at hand really is. A large part of this, as mentioned above, is a healthy relationship with shareholders and investors and making sure that it stays that way.
Trend in Shareholder Activism
If history proves anything, activism typically occurs at companies that fit the “mega-cap” range, however, this does not mean that a shareholder will push for a board seat at a smaller public company. It is important for board’s to create an environment where they can better listen to shareholders in order to make sure their voices are heard and where there is a direct positive impact on the direction of the organization.