Mark HarnettDue in part to a rise in shareholder activism, a spotlight has been placed recently on corporate governance policies. As a result, it’s paramount that public companies implement communications strategies that focus on corporate governance.

Rare is the publicly traded company whose board hasn’t thought at length about corporate governance: reviewing it, adjusting it, and improving it to conform to best practices.

Investors are now holding management teams and boards accountable for what they deem “bad behavior,” and the repercussions can be significant. Activists, specifically, use lapses in corporate governance as mechanisms to tarnish the reputation of management teams and board members. Doing so helps activists build goodwill with other shareholders, as well as garner good press, both of which can bolster activists’ agendas.

Given all that’s at stake, it’s crucial for public companies to implement clear and decisive communications strategies around corporate governance. Above all, companies should bear in mind the old adage: communication is a two-way street.

While proactive communication regarding corporate governance policies is key, listening to what shareholders have to say is of equal, and perhaps greater, importance.

Generally recognized features of sound corporate governance include: annual election of directors, a majority voting standard for the election of directors, separation of the Chairman and CEO roles, and allowing for proxy access, the ability for shareholders to call special meetings, among others. Together, these structures are the key to manifesting good corporate governance.

A company’s shareholders should view the board as being engaged and accountable to its shareholders. Not only must board members have the right skill set for the job, as well as the right level of shareholder engagement, they cannot be entrenched, or perceived as entrenched, due to a company’s structure or other actions.

Regular engagement with shareholders is arguably the most important aspect of corporate governance. Periodic (i.e., at least annual) shareholder outreach to the governance departments of institutional holders, via face-to-face meetings or telephonic discussions outside of proxy season and other special situations, is the cornerstone of a company’s communication of governance practices.

Often, the root of investor frustration is the lack of communication from management teams except during the proxy season to solicit a vote.

Companies should strongly consider participating in a “corporate governance roadshow,” which provides the management team and Board with an opportunity to highlight positive governance policies, while allowing the company to convey any important board-level developments or potential changes to the makeup of the board. Likewise, shareholders then have a chance to communicate their likes and dislikes, as well as to note the qualities they would like to see reflected at both the director and management levels.

However, companies should be careful not to tout their corporate governance practices, as shareholders and proxy advisory firms tend to believe that such practices should already be in place.

As with all interpersonal relationships, good communication is not just about telling your story, it’s about being a good listener. Investor relations are no different.

Discussions with investors and institutions must represent a true dialogue, striking a balance between showcasing policies regarding corporate governance, and demonstrating a willingness to listen open-mindedly. A company must engage in an earnest dialogue and be open to evaluating and implementing shareholder feedback.

Furthermore, effective, ongoing communication with investors can be particularly helpful in deterring potential shareholder activism. Before an activist has made initial contact with a company, they have often canvassed the investor base, in order to get a sense of where the management team stands on shareholder engagement.

If they learn that management has rarely or never communicated with shareholders, the activist then has ammunition to draw upon and may have already developed shareholder support for a future proxy campaign. If, however, the feedback points to a temporary “rough patch” within the company — one from which management has communicated a clear and logical path forward — activists are more likely to believe that they will pursue a proxy fight at their own peril.

Companies should also strive to understand and implement, as appropriate, the corporate governance guidelines outlined by proxy advisers, such as ISS and Glass Lewis & Co. Using the proxy statement and investor relations website, companies can clearly call out their best-in-class corporate governance policies, while highlighting robust investor relations initiatives.

A key corporate governance score for companies to keep in mind is the ISS QuickScore, a decile-based score that indicates a company’s governance risk relative to its index or region.

QuickScore is a publicly available metric and can be viewed on financial websites, such as Yahoo! Finance, Bloomberg and NASDAQ Online. Most importantly, proxy advisers want companies to demonstrate that they are being responsive to corporate governance initiatives that have received shareholder approval, and can penalize unresponsive companies by recommending against directors or executive compensation plans.

At the end of the day, even the highest-rated corporate governance policies are not going to inoculate a company from the threat of activism. Investors, particularly major institutions, are primarily concerned with a company’s long-term growth prospects and exploring ways to accelerate that growth and increase valuation.

If shareholders do not feel confident that the board and management team have the strategies and skills necessary to drive shareholder returns, then there are bigger issues at hand. However, activists frequently tie their arguments about poor performance to complaints about corporate governance, resulting in a one-two punch to the company’s defenses.

Implementing strong corporate governance practices internally and then effectively communicating them to shareholders and other constituents can foster good relationships with institutions and their governance departments. By doing so, companies can eliminate a key piece of ammunition for activists — and most assuredly be better off for it.

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Mark Harnett is a Managing Director at Sard Verbinnen & Co.