Radical BoD Transparency

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 BoDs 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 BoD customs and practice.

These days, despite their pro-forma efforts at shareholder engagement, BoDs remain largely insulated from investors. Senior executives, general counsel (GC), and investor relations (IR) staff handle most if not all contact with shareholders. When BoDs 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 BoDs and investors, and the substance of their discussions. Done well, it likely makes it much harder for an investor to vote against a BoD if and when an activist shows up.

Open communication

Most investors would welcome a direct channel with the BoD. Instead of going through the GC or IR, 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 BoD 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 becomes finding information, and arranging contact with senior executives that do have answers. Rather than the CEO brokering meetings with directors, we prefer directors arranging for investors to meet the CEO and other executives that can help the PM understand its investment.

IR can facilitate the process, and log 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.

In reality, 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 and dislike about our corp gov?
• 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 to 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 interest, 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 BoD 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 BoD that does this well will find personal relationships with large investors pays off. A shareholder will have a hard time voting against directors that it knows 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. Who wants to start?