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March 03, 2011
Fifth Analyst Call Would Add Governance Issues to Talks with Issuers
    by Robert Kropp talks with Elizabeth McGeveran of F&C and Deborah Gilshan of Railpen about a proposal for annual dialogue between investors and companies on corporate governance.

Despite legal challenges mounted by the Business Roundtable and the US Chamber of Commerce seeking to overturn Securities and Exchange Commission (SEC) regulations allowing for proxy access, or the nomination by shareowners of directors for corporate boards, 2011 remains a watershed moment for the expansion of shareowner rights. Although proxy access has been suspended pending a decision by the US Court of Appeals in Washington, this is the first year in which companies are required to permit an advisory vote by shareowners on executive compensation.

As Elizabeth McGeveran, Senior Vice President, Governance & Sustainable Investment for F&C Management, told, "We're in a period of transition, and companies and investors want to make the most of this opportunity. Finding ways to improve dialogue between issuers and owners is one way of doing that."

McGeveran and Deborah Gilshan, Corporate Governance Counsel for Railpen Investments, talked with about a new proposal for improving such dialogue, named the Fifth Analyst Call. The proposal calls on US companies to "host a dedicated conference call for institutional investors focused exclusively on corporate governance as reflected in the annual proxy statement."

"The Fifth Analyst Call would serve a purpose similar to standard quarterly results calls but follow the publication of the proxy statement and precede the annual shareholders meeting," the proposal, which currently has the support of 14 institutional investors with $1.84 trillion in assets under management, continued.

US-based supporters of the proposal include the Florida State Board of Administration and Walden Asset Management.

According to the proposal, participants in the Fifth Analyst Call would include the independent board chairman or lead director, be hosted by the issuer, and co-chaired by the company and a lead investor. "The aim of the call," the proposal states, "Will be for issuers to explain to institutional investors their corporate governance philosophy and strategy and for investors to ask questions and raise concerns prior to voting their shares at the AGM (Annual General Meeting)."

Basic governance issues that are likely to be addressed in such a call include governance framework and philosophy, risk management, executive compensation, and board structure.

Gilshan told, "We recognize that companies talk with their investors about their quarterly reports throughout the year, but corporate governance issues often are not discussed in the quarterly analyst calls. We thought it would be helpful to have a similar dialogue with directors of the boards of companies we invest in to talk about corporate governance issues."

"This is not necessarily related to any specific filers or specific campaigns," McGeveran said. "What we want it to lead to is boards making good decisions around corporate governance that reflects the interests of their shareholders. We're looking for ways for boards to understand what their shareholders are interested in, in terms of corporate governance in all its respects."

Referring to a speech by SEC Chairman Mary Schapiro to the National Association of Corporate Directors (NACD) last October, Gilshan said, "She specifically talks about improving engagement. The proxy statement is a starting point, but truly informed engagement is communication between directors and shareholders."

"Shareholders want to make informed voting decisions, and part of the process is hearing the company's perspective," Gilshan continued. "Schapiro said in her speech that engagement means more than just disclosure."

The proposal has met with resistance in some quarters. In an article posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation, Davis Katz, a partner at Wachtell, Lipton, Rosen & Katz, described the proposal as "redundant," and warned that if implemented it could trigger Regulation FD (Fair Disclosure) enforcement action by the SEC.

Regulation FD "provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to certain enumerated persons…it must make public disclosure of that information."

McGeveran took issue with Katz's description of the proposal as redundant.

"That's an interesting point of view, because the proxy is only a one-way form of communication," she said. "It certainly doesn't provide an avenue for shareholders to communicate with their directors. Neither directors nor shareholders would view that as the beginning or the end of the dialogue."

Regarding the relevance of Regulation FD, McGeveran said, "We have not found that Regulation FD is a significant impediment to communication with corporations about important issues. Because the corporation is hosting the Fifth Analyst Call, it can be open to all investors and the information can be made available to the market very easily."

"As a pension fund, Railpen controls much of its voting itself, not the fund managers," Gilshan said. "The real asset owners of companies are becoming more involved. When companies only talk to the top ten shareholders, they may not be reaching those people making the voting decisions for those underlying shares."

The proposal refers to pilot companies that will become involved in the program, about which McGeveran said, "We've reached out to a very small number of companies, and our proposal is making its way through the companies' systems. We're trying to work with companies that we thought might be interested in giving this a try."

The benefits to companies participating in the program, according to the proposal, include efficiency in communicating with institutional investors and beneficial owners, the ability for directors to interact directly with shareowners, and access to mid-sized investors.

"This is a way for companies to reach beyond the biggest shareholders with whom they most often have contact," McGeveran said.

"Shareholders will be able to make better voting decisions without simply relying on proxy advisory firms," Gilshan added. "This is not a (shareowner) proposal, but an idea we've petitioned companies to think about."


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