Directors have to face the music

When the going is good, the chairman and board can bask in the warm glow of shareholder appreciation.
Take, for example the recent Delegats’ annual meeting, where the chairman proudly announced a stellar result.
But when trouble looms, the annual meeting can be a starkly different experience.
In both Australia and New Zealand, the recent annual meeting seasons have been dominated by concerns about rising directors’ fees and executive remuneration in the face of falling share prices and company earnings.
For the first time in years, directors have had to break bad news to investors and face up to tough questions.

Board-shareholder relations are important and directors need to engage owners, thereby forming the functional bridge between shareholders and managers.
In reality, directors have little choice as owners now want greater control over their investments and are demanding a richer dialogue. In Britain, the chairs of some public companies are meeting periodically one-on-one with investors.
At the June 2008 conference of the International Corporate Governance Network, institutional investors made it clear that they now expect boards to open up lines of communication.
Fifty-four per cent wanted to engage with all directors and 81 per cent indicated that direct dialogue between directors and shareholders enhances returns.

The annual report and annual meetings are reporting requirements for most organisations. Whilst some criticise printed communications from the company as reader-unfriendly and a one-sided process, the annual meeting is one of the few opportunities minority shareholders have to exercise their legal right to question management of the company.

James Strong, chairman of Woolworths Australia which owns New Zealand supermarkets Woolworths, Foodtown and Countdown, recently said that many directors don’t like annual meetings as they can get pretty rough.
Some questions might be deemed trivial, such as complaints about shopping trolleys not wheeling straight, but shareholders as owners should be given the opportunity to seek answers regardless.
Mr Strong felt boards should view the annual meeting as a barometer for shareholder issues.
Directors should harden up, he said, because taking on positions of importance means that you have to be prepared to answers tough questions.
But there are positives. The same meetings are also an opportunity for the board and senior management to explain the organisation's strategy.
The relationship between a board and its shareholders is critical. Directors have to balance their duty to the company as a legal entity with that of adding value for investors. The two aren’t the same.
But when they engage with owners they should think as owners. Shareholders believe that companies are better off when they are engaged in dialogue with directors.

NZX is considering a rule change to improve the direct accountability nexus of minority shareholders and independent directors.
It is proposing that where a parent company or a single majority shareholder holds more than 50 per cent of the shares in the company, then neither that parent company nor that majority shareholder may cast votes on the remuneration, appointment or reappointment of independent directors.
If it happens then responsible directors will have to listen. Power to the people?