Inviting Comments on Responsibilities for Investor Communications
Last week's Compliance Week column by Stephen Davis and Jon Lukomnik has focused the attention of Forum participants on the essential communication process of "Say on Pay," and particularly on the issue of professional responsibilities for the required exchange of information and views between corporate and investor decision-makers. The role of corporate investor relations officers, for example, was addressed in the comments copied below by Leonard Rosenthal, a scholar recognized for expertise in corporate governance and investor information who has been actively involved in NIRI programs, followed by the response of the column's co-author Lukomnik.
Please offer your own views or questions, either here in the "comments" box or in direct communications (subject to standard Forum privacy conditions, of course, respecting your anonymity unless you specifically approve identification). - Gary Lutin
Leonard Rosenthal, whose comments are presented below, is a Professor of Finance at Bentley University and is recognized for his research that relates securities valuation to corporate governance and information access variables. It should be noted that Professor Rosenthal's comments continue an exchange of views started a year ago in response to a paper co-authored by Dr. Davis addressing responsibilities for investor communications relating to corporate governance issues. That 2008 debate about communication responsibilities was in fact what stimulated the initiation of our current Forum program addressing "Say on Pay." For a report with links to the paper and responsive comments, see
Comments of Leonard Rosenthal April 21, 2009
April 21, 2009
Comments on “Create Meaningful, Effective Say-on-Pay Plans,” by Stephen Davis and Jon Lukomnik, Compliance Week, April 14, 2009
My initial reaction to this column is that the authors are doing a good job of explaining how say on pay should work. Examples appear in their introduction when they use expressions such as “please help us restore some rationality,” “we believed say on pay would increase communication among… leading to more nuanced communications,” and Section 2 view of an effective communication process is spot on. It is wonderful to see that the authors have embraced such a constructive approach to say on pay.
This positive view came to a screeching halt in Section 4, when the authors assert their view that the very professionals on whom both the company and investors rely for two way communications – investor relations professionals – have little or no ability to do so on say on pay. This undermines their own points.
Dr. Davis and Mr. Lukomnik seem to believe that corporate governance professionals are the only ones with the specialized knowledge to communicate with investors on the subject. The authors say that Investor Relations Officers (IROs) are only “best acclimated to dealing with analysts who want to know, for trading purposes, what will happen next quarter.” Are they not aware that it is the IROs who regularly communicate with investors/potential investors on all the subjects that inform investment decisions – earnings, dividends, strategy, new executive hires, acquisitions, etc., – and indeed, corporate governance? Do they really believe that the only job of IROs is to provide quarterly information for enhanced trading opportunities, when in fact their role is to effectively manage communications so as to build a stable base of long-term investors?
Given the obvious importance of corporate governance to the success of a public firm, it is hardly surprising that IROs consider corporate governance to be a subject of importance to investors and a cornerstone of their body of knowledge. Since executive compensation has become such a hot-button issue, IROs have recognized the necessity of talking with their major investors and others about this and have relayed these observations back to their boards and senior management. It is then clearly their responsibility to explain to their investors what their firm is doing with regard to this important subject.
In summary, communication on corporate governance, and say on pay in particular, is not best served by creating a new profession to deal with it as if were something unrelated to all other issues that affect investor decision making. It is far more effective to make communications about corporate governance a top priority for those who investors already rely on for all other corporate information – investor relations professionals.
(Note: As a professor of finance at Bentley University, and as a member who has participated in programs with the National Investor Relations Institute, I want to state for the record that the views expressed above are mine alone and not those of these organizations with which I am associated.)
Leonard Rosenthal, Ph.D.
Professor of Finance
Waltham, MA 02452
Jon Lukomnik, as one of the authors of the column on which Professor Rosenthal had commented, offered his response below. Mr. Lukomnik is the managing partner of Sinclair Capital LLC and a co-author of The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda.
April 22, 2009
Here is my response to the response:
Although it may surprise Professor Rosenthal, we did not say that IR had no role.
What we said, exactly, was "don’t make the mistake of automatically assuming that your investor relations unit is best placed to make those choices. IR is often best acclimated to dealing with analysts who want to know, for trading purposes, what will happen in the next quarter. The result is that a company can be surprised come the annual general meeting, when a corporate governance issue surfaces that never cropped up in the quarterly analyst calls. That helps nobody. Many companies understand this; it’s one reason they assign the corporate secretary responsibility for the proxy. You could make the corporate secretary responsible for staffing the communications plan as well. Or you could restructure your IR department to communicate with the governance professionals, not just the analysts, at investment houses."
In other words, don't assume.
In fact, we agree with Professor Rosenthal that IR should have a role. Indeed, I have a very proactive IR firm as a client, and, both through it and individually, have advised IR at Fortune 500 companies regarding corporate governance issues. Unfortunately, some IR departments just don't think beyond stock price movements. Thankfully, due to Professor Rosenthal and others, they are becoming less prevalent. But they are not extinct. Our point was to say "don't assume." Make an evaluation if your IR program is sending the right SOP message to the right audience. If it is, fine. If it's not, either make them evolve to be able to deal with these issues or supplement them.
Clearly, Say on Pay and most corporate governance issues are nuanced. I apologize if the nuance did not come across in our column.
Best regards to the Forum, and thanks for all the good work,
Sinclair Capital LLC
New York, NY