Radical Transparency for Boards and Investors: Building Bonds, Bruising Egos and Breaking Eggs
By Michael R. Levin, Contributing Author / October 24, 2024
Ray Dalio founded Bridgewater Associates on radical transparency. Over time, the firm developed an elaborate organization and unique culture to promote “honesty and openness.” It turned “unusual and confrontational” as it grew into the largest hedge fund in the world.
Why not adapt some form of this idea to how boards interact with shareholders? Maybe use a bit of that thinking, but certainly not all of it. While the ideas we set forth here would no doubt strike Dalio as far from radical, they certainly would look that way relative to current board customs and practices.
These days, despite their pro-forma efforts at shareholder engagement, boards remain largely insulated from investors. Senior executives, general counsel (GC), and investor relations (IR) staff handle most, if not all, contact with shareholders. When boards and investors do talk, they confront strict policies about what directors can say and who must sit in the room with them. Shareholders might get a few minutes and a couple of questions at the AGM. Consequently, investors have little knowledge of and contact with the directors they elect to oversee their investment.
A form of radical transparency turns this around in two areas: the structure and process for communicating between boards and investors, and the substance of their discussions. Done well, it likely makes it much harder for an investor to vote against a board if and when an activist shows up.
Open Communication
Most investors would welcome a direct channel with the board. Instead of going through the general counsel or investor relations, a company should encourage or even require directors themselves to talk to shareholders.
A company might assign each director a few of the largest shareholders, with the job of promoting a positive relationship with each. If each director on a ten-person board assumes responsibility for five investors, the company can easily cover a significant percentage of the voting shares.
That director should really open-up, too. Provide a private email address and mobile phone number and encourage a PM to get in touch whenever they want. At the first meeting, the director could ask (among other things) what kind and frequency of communication from that director the PM wants—email only? quarterly updates?
Of course, directors likely won’t have all the answers for a given investor. Another job involves finding information and arranging contact with senior executives who do have answers. Rather than the CEO brokering meetings with directors, we prefer directors to arrange for investors to meet the CEO and other executives who can help the PM understand its investment.
Investor relations can facilitate the process and log in contacts with investors. Legal can help directors understand what constitutes MNPI and related concepts. Otherwise, they should leave it up to directors and shareholders.
Honest Communication
Directors can also upgrade what they talk about with investors. When it does happen today, directors recite a highly edited list of company talking points that mostly repeat what a PM can find in an SEC filing.
There are few legal limits on what directors can cover: avoid employment matters, trade secrets, or material non-public information. Otherwise, directors can and should willingly cover a wide range of subjects that would interest a PM. We recently encouraged one new director to open up in exactly this way.
Sure, the director needs to answer questions from investors. The director should also ask a few:
What is your thesis for the investment?
How do you want us to balance growth and risk?
How should the balance sheet look, and how much cash should we maintain?
What do you like and dislike about our corporate governance?
What do you think of our strategic direction?
If each director solicits this input from the few investors in their portfolio, then the company can create a detailed, authoritative account of what investors expect from the company. Doing this frequently during the year (or as frequently as a given investor desires) avoids having to plea for support a month before the AGM.
Directors should answer investor questions consistently and thoroughly. Here again, IR can prepare directors with all the information they need. This briefing becomes the starting point for discussions with investors, rather than the only list of bullet points that a director can address.
Not for Everyone, But It Should Be
Dalio acknowledges radical transparency “takes getting used to” and isn’t for everyone. The notion that directors might communicate directly and regularly with investors may terrify CEOs, the GC, and IR. Either they just don’t like the idea of directors and shareholders talking without them in the room, or they don’t trust one or another director to handle that relationship well.
As for the former, too bad. Shareholders elect directors to represent their interests and have a right to their own relationship with them.
For the latter, if the company can’t trust a director to handle this well, then maybe it needs better director training or a different director. This becomes a critical subject for board refresh efforts: to what extent can a director work constructively with individual shareholders? Can we rely on her to promote an open, honest relationship with a few large investors? If she can’t or won’t, it’s time for a fresh face.
A board that does this well will find personal relationships with large investors pay off. A shareholder will have a hard time voting against directors that know them well, beyond the plain biography in the proxy statement. Obviously, the time to do it is not just a month before the AGM, but continuously over months, quarters, and years.
To our knowledge, no company does things this way. Perhaps this is worth a try.