The Boardroom February 26, 2010, 12:51PM EST

Boards: Understand Your Shareholders

When it comes to getting in touch with shareholders' wants and needs, boards of directors need to make an extra effort—and not just around proxy season. The ABA's Carol Hansell explains how

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(This story has been changed to correct the name of Carol Hansell's job title.)

In electing boards, shareholders are seeking representation for themselves. Yet many board members remain surprisingly uninformed about their shareholder base—until proxy season approaches and they begin to wonder if they can get the votes they need. To identify some steps boards can take to better understand their shareholders, BusinessWeek.com columnist Beverly Behan spoke with Carol Hansell, chair of the American Bar Assn. Subsection on Corporate Governance. Edited excerpts of their conversation follow:

Carol, why has the issue of boards' better understanding shareholders taken on increased importance?
Because the board is accountable to the shareholders (who elect them, after all), it's important for board members to understand their shareholder base and what issues are of concern to them. This topic has recently taken on increased importance because votes that were previously routine are now being used as vehicles by shareholders to send a message to the board if they are unhappy, such as majority voting and "say on pay." Boards need to get an understanding of where their shareholders stand on these and other issues and keep their finger on the pulse of their shareholder base. In my experience, most boards could really raise their game in this area. Moreover, this is not something they should just focus on once a year—as proxy season looms.

What are some of the key questions board members should be asking about the company's shareholders?
Directors should start by routinely asking company management, and specifically the investor relations executive within the company:

a) Who are our Top 10 shareholders?

b) How long have they been our Top 10 shareholders?

c) How frequently do they turn over?

d) What do we understand their investment objectives to be?

If the board members don't routinely receive analyst reports, they need to make sure they do. Ask for a list of the analysts who cover the company, and request that their reports routinely be forwarded in prereading materials or otherwise.

What other practices do you recommend?
I think the Governance Committee should take the lead in this area—that is the natural board committee to take responsibility for keeping abreast of shareholder issues. I would recommend having a briefing from the company's investor relations executive regularly included on the agenda of the Governance Committee. In this session, questions the Governance Committee should ask include:

a) In the last quarter, how many shareholders called in? Who were they and what were they asking about?

b) What were the venues (conferences, analyst meetings, etc.) where the company's been out in front of shareholders in the past quarter? What were the key messages we were delivering at these conferences to our shareholders? What was their reaction?

c) What are our shareholders asking about? What are they concerned about?

Any time that the board makes a decision that might prompt some shareholder reaction, such as cutting the dividend, for example, shareholder reaction to that decision is also useful to gauge in this meeting by asking: 1) How did the analysts who cover our company react to this decision? Ask about the toughest analyst: How did she or he react? And 2) Did we receive any calls from analysts or other shareholders relative to the decision? How many calls and from whom?

How should board members not on the Governance Committee be updated on shareholder issues?
If shareholder issues are discussed in the Governance Committee, the committee chair will report out to the full board. Noncommittee members would receive regular updates in this fashion. However, I also think it could be helpful once a year for the entire board to receive an update from Investor Relations on shareholder issues.