INSIDE THE BY DAVID W. ANDERSON, MBA, Ph.D, ICD.

D
BOARDROOM The Anderson Governance Group

Shareholder Engagement:
Harness The Potential For
Your Board

S HOULD BOARDS ENGAGE PROACTIVELY

with their shareholders? Despite legitimate concerns,
the answer is yes. The more challenging questions
are when and how should boards engage shareholders?
For while engaging shareholders invites risk, so does
not engaging with them. Directors should adapt
their mindset and skills to mitigate both these risks
and purposefully harness the value of shareholder
engagement, making a virtue out of a growing necessity.
In this article, I outline the
rationale for shareholder
engagement, recognize
practical considerations for
why boards ought to exercise
caution (and how to turn
these to advantage), suggest
ways to segment shareholder
interests, offer a range of
means for boards to connect
meaningfully with key
shareholders in order to derive
value from their perspectives
and build useful relationships,
and provide recommendations to boards seeking to
engage shareholders.
Engagement Rationale: Finding Virtue in Necessity
In earlier Inside the Boardroom columns, I advised
directors to broaden their traditionally self-referential
outlook on the world by asking for direct feedback on
their performance from executives1 and seek out their
owners to engage in direct dialogue on governance
practices.2 I have offered a business rationale for even
broader stakeholder engagement to capture the value
inherent in the corporate responsibility movement.3
Most recently, I advised a specific exchange between
boards and their owners on organizational risk profile
as an input to the board’s development of its risk-
calibrated strategy.4
Some readers see this advice as dangerous. Indeed, if
implemented incautiously, it would be. While judicious
stakeholder engagement holds the potential to enhance
board performance and company value5, it would be
better not to engage shareholders than to do so in
an undisciplined manner.
Given evolving shareholder
expectations and a shifting
balance of power, broader
shareholder engagement
has become unavoidable.
The director community is
being significantly affected
by shareholder behaviour
(e.g., influence over executive
pay; proxy advisory firms
directing voting behaviour).
These shareholder
initiatives are not without
merit; indeed, they merit a thoughtful response.
Just as directors have become far more engaged with
management in the exercise of corporate governance,
so too are shareholders wanting more engagement with
the authority – boards – sitting atop the organizations
affecting their investments. Boards have retracted
the almost complete delegation of their authority to
management that existed in decades past; in a similar
way, we are seeing shareholders retracting the almost
complete delegation of their “authority” to boards.
While the means and outcomes are not certain, the
implications for directors are likely to be profound, as

1 Anderson, D.W. (2007). How well is your board performing? Your executives may have some (surprising) answers. ICD Director, 134 (October), 18-21.
2 Anderson, D.W. (2008). Are you listening to your owners? Directors must step up their game, once again. ICD Director, 139 (August), 22-25.
3 Anderson, D.W. (2008). Finding value in corporate social responsibility: Is it time for CSR to come out of the closet? ICD Director, 140 (October), 26-29.
4 Anderson, D.W. (2010). Building bolder boards in Canada: Strategic innovation, not more risk management, is needed most. ICD Director, 149 (April), 45-46.
5 For further context, see the Supreme Court of Canada’s ruling on BCE (December, 2008), which reiterated the need for boards to consider all stakeholder
interests when making corporate decisions, as consider how the board would come to know those interests without engagement. See: Anderson, D.W.
(2009). Reflecting on the Supreme Court’s BCE decision: What can directors learn? ICD Director, 144 (June), 39-44.

Issue 150 | June 2010 | 39

INSIDE THE BOARDROOM | HARNESS THE POTENTIAL
initiatives such as “say on pay” and access to the proxy
make clear.
Directors should now seize the opportunity to engage
in substantive discussion among themselves and with
their shareholders to purposefully shape the quickly
shifting landscape of corporate governance. The
Institute of Corporate Directors may provide value to
the institution of directorship by bringing directors
and shareholders together to clarify and appreciate the
vital place of boards. Shareholders want more power
and influence because they have re-imagined their place
in the order of things as a result of realizing just how
different their views may be on important matters (e.g.,
directors and shareholders may have divergent views on
executive pay).
For individual boards, the potential benefits of
shareholder engagement may be considerable: better
knowledge, more robust networks and greater respect
for its authority.
Better knowledge through broader perspectives. Boards
rely heavily on management for the information
they use to make decisions. Relatively few boards
employ independent means to gather or verify data or
otherwise inform deliberations, though some boards
have seen the value in seeking information more
broadly. Understanding shareholder perspectives
through deliberate and structured means gives a board
deeper insight and fosters better decision-making.
Robust networks from deeper relationships. Directors
have learned that respectful relationships with
managers earn trust, which opens communication,
builds credibility and sharpens efficiency. In turn,
relationships deepen. In times of uncertainty, strong
relationships are often the social glue that keeps people
working together toward common goals. Boards which
proactively nurture deeper shareholder relationships
enjoy faster access to potentially relevant information
and can rely on those relationships when they are most
in need – in addition to counter-balancing the effects
of close ties with others (e.g., deeper relations with
shareholders may counter-balance the pressures faced
by directors in pay and succession, given directors’
relations with executives).
Respected authority through recognized legitimacy. A board’s
power to achieve its objectives can be constrained when
40 | Institute of Corporate Directors
it lacks legitimacy in the eyes of its shareholders. By
showing respect for the interests and perspectives of
shareholders, a board invites reciprocal respect from
shareholders. Building the legitimacy of board power,
which underpins its authority, builds faith in the
organization, creates degrees of freedom to act with the
support of shareholders (most critically when various
interests are in conflict), and bolsters the credibility of
management.
Recognizing Danger: Turning Caution To Advantage
A board engaged with its shareholders courts many
dangers – significant but manageable – which when
recognized and planned for, may actually strengthen
the board. Boards choosing to seek the value of
engagement should carefully consider these pitfalls and
act accordingly: distraction, disclosure, discordance,
interference, and politicization.
Distraction. Directors must always give primacy to
that which serves the purpose of the board: to craft
with management the optimal risk-calibrated strategy
for the business, nurture executive leadership talent
and oversee management’s ethical, disciplined and
compliant business execution. Shareholder engagement
must be made to serve these ends, not distract from
them. Directors should monitor their expenditure of
time and energy against the value generated to gauge
the utility of their engagement strategy, adjusting course
as appropriate.
Disclosure. As regulators have made clear, the
prohibition against selective disclosure does not
seek to diminish communication with shareholders,
but to ensure market integrity. Yet fear of selective
disclosure prevents many boards from even
contemplating shareholder engagement. The issue
is not communication but choice, competence
and confidence. If the choice is made by directors
to communicate, the issues of competence and
confidence can be addressed through training and
support regarding appropriate content for discussion
and a consistent approach to how that content
is communicated. Education and support can
substantially reduce the risk of directors crossing the
line, by keeping directors focused on governance (not
management) issues.
Discordance. Boards must speak with one voice; many
voices purporting to speak for a board muddy the
 INSIDE THE BOARDROOM | HARNESS THE POTENTIAL
message and may leave both the market and the
company confused. Designating particular directors
to speak on behalf of the board resolves this dilemma.
Board leadership roles make such choices simple, with
the board chair being the primary spokesperson and
chairs of the committees addressing areas within their
specialty. The discipline of directors to respect these
assignments reduces the likelihood of communicating
discordance and offers a message of sophistication to
shareholders.
Interference. Directors and managers must be shielded
appropriately from external interests seeking to probe or
influence their thinking, priorities or activities. Inviting
shareholder engagement can create an expectation of
access that when exercised can hinder or confuse staff.
To prevent vocal shareholders from seeking to have
disproportionate access or reaching into the organization
to make inquiries or give advice to management, boards
need to be clear with shareholders on acceptable
interaction and devise recourse for directors and
managers who find themselves so challenged.
Politicization. Directors are not – and must avoid
the pressures to become – politicians, despite the
demands made on them by shareholders advocating
for parochial interests. By opening themselves to input
of shareholders, directors may be seen to be (and may
feel themselves to be) responsible to shareholders,
as if they represented constituents. Boards must be
clear that directors serve only the interests of the
organization, regardless of which shareholder makes a
claim of allegiance-owed.
Shareholder Segmentation: Understanding Those
Who Can Affect You
Shareholders diverge markedly from each other in their
perspectives and interests. Two subsets of shareholders
can be distinguished by their mindsets: share “owners”
and share “investors”. Owners and investors differ in
the commitment to the cause of the organization, the
nature of issues they pay attention to, what they are
willing to offer advice on and about which they expect
to exercise influence, and the time horizon over which
they judge their success.
In approaching shareholders, boards should set out
the criteria by which they will filter information.
Specifically, engagement criteria should help directors
decide when, how, with whom and under what
circumstances they will respond to or reach out to
shareholders. Such criteria may include shareholder
mindset (e.g., owner, investor), shareholder type (e.g.,
institutional, hedge fund, private equity, retail), extent
of shareholdings (e.g., by percentage or a rank ordering
of the top five or ten shareholders), controlling
positions, geography and board membership itself
(special care must be taken to manage minority
shareholder interests).
Boards should consider what relationship they wish to
establish, if any, with institutional investor advocacy
groups. These groups have diverse membership and
differ in their willingness to define a common set
of standards they expect public companies to adopt.
Boards should also establish rapport with rating
agencies, proxy advisors, market regulators and the
media, as these bodies exert a powerful influence
over the perceptions of shareholders and their voting
behaviour in proxy season. A board’s relationships with
these bodies may be coordinated with the assistance of
management, but must remain under the independent
control of the board. Boards should consider retaining
an independent advisor to facilitate such engagement.
Engagement in Practice: Respecting Voices
While shareholder engagement is in its early stages,
recent examples point direction. Some boards have
met with major shareholders and discussed a range of
governance issues (e.g., director nominations and board
composition, executive pay, general risk tolerance and
profile); others have invited input via websites.
Three levels of communication with shareholders
are discernable: disclosure (passive compliance),
responsiveness (reactive efforts), and engagement (active
relationship-building).
The simplest form of communication with shareholders
is a board’s oversight of management’s communication
with shareholders. This is necessary and may even be
sufficient for some boards, but represents a low bar.
Using required disclosure events to communicate with
shareholders is an important means for boards to express
their views, but may not be satisfying to shareholders.
Nonetheless, the transparency provided by such
disclosure, in contrast to actual dialogue, may be enough
to make sure shareholders are not caught by surprise on
key issues (e.g., an organization’s risk profile).
Issue 150 | June 2010 | 41
INSIDE THE BOARDROOM | HARNESS THE POTENTIAL
Boards can reach a higher level of communication by
being responsive to expressed shareholder views off-
cycle and beyond the AGM. This can include adapting
communication based on shareholder concerns as
understood through general market feedback or
specific feedback to organizational initiatives. Public
speeches by board chairs can serve this purpose. Passive
means to listen to shareholders can be set up via the
company website to allow shareholders to comment,
pose questions or offer advice or input to the agenda
in advance of AGMs. This site should be monitored
by management’s investor relations staff and corporate
counsel and summarized for the board.
For boards seeking to build relationships with
shareholders, active forms of engagement include
exchanges of ideas through invited meetings (e.g.,
between a board or committee chair and a shareholder
or between board representatives and several
shareholders) or a governance “road show”. Such
meetings allow for listening to shareholders and sharing
perspectives. It is important that discussions be focused
on governance, in concept (e.g., division of powers/
influence), in form (e.g., director nominations), and/or
in practice (e.g., strategic and risk profile, pay, decision-
thresholds, change of control).
Boards should use engagement to gather shareholder
perspectives and integrate these into board discussions.
Engagement thus has the effect of respecting
shareholder interests and using insights gained to
sharpen board discussions. As a result, boards build
respect and legitimacy, and make the case for a
strong, clear role for boards in the system of corporate
leadership. Done well, boards can shape proxy
resolutions or address concerns in advance to preclude
such actions from occurring.
Recommendations for Shareholder Engagement
1. Directors need to organize themselves and advocate
for a robust system of corporate leadership with
corporate governance exercised by boards at the
centre – open to shareholders and yet retaining the
power to guide and hold management accountable
for performance.
2. Individual boards should stake out a position on
their own role and those of other key actors within
this system of leadership.
6 See Anderson, David W. (2010). 20 Questions Directors should ask about the governance committee. Canadian Institute of Chartered Accountants. Toronto.
7 Anderson, D.W., Maly, J. and Melanson, S.J. (2008). Directors, executives and investors are refashioning governance: Practical research tracks governance
evolution. ICD Director, 138 (June), 28-32.
This article originally appeared in the Director Journal, a publication of the Institute of Corporate Directors (ICD).
42 | Institute of Corporate Directors Permission has been granted by the ICD to use this article for non-commercial purposes including research, educational
materials and online resources. Other uses, such as selling or licensing copies, are prohibited.
3. Directors should create a shareholder engagement
strategy consistent with these roles and appropriate
to the mission and resources of the board.
4. Directors should clarify their board’s governance
principles and mandates, create communication
processes, and designate leadership roles to speak for
the board.
5. The board chair with the CEO should build internal
relationships between the board, key committees
and the company’s investor relations department,
defining roles and responsibilities.6
6. The board chair should manage and integrate
shareholder feedback into a coherent, manageable
narrative so that the board can take advantage of this
knowledge when making decisions.
7. Directors should undertake education on their own
board philosophy and policies regarding shareholder
engagement and practice communication prior to
interacting with shareholders.
Summary
Directors must recognize and address powerful
shareholder forces at play, each seeking their own
interests which may or may not align with those of
directors and their organizations. Directors should
create and implement a value-enhancing engagement
philosophy and practice for their board tempered but
not stifled by due caution for the attendant risks.
With the world’s institutional investors gathering in
Toronto this June, now is the time for directors to
engage their shareholders with purpose, vigour and
care. Directors and investors both know they are in a
new era of governance7, yet the implications for their
roles and interactions are not yet fully appreciated.
Shareholder engagement deserves director attention
both for potential for getting it right as getting it
wrong. The challenge and opportunity for directors
and shareholders are to act constructively, based on
legitimate needs and expectations for a new way of
doing things, to build a truly better, more robust, fair,
and accountable system of shared corporate leadership.
David Anderson is the President of The Anderson
Governance Group. He can be reached at
david.anderson@taggra.com and (416) 815-1212.