SPIN ● April 2006 Edition ● www.lacp.com

EMERGING TRENDS: Investors Making a Collective Call on Barraged CEOs

LACP RSS channel for monthly features. In this post-Enron/Worldcom/Tyco era, today's institutional investors are taking less for granted from in-house and board-level corporate governance committees. Instead, such fund managers and major shareholders are proactively inserting themselves into corporations' decision-making processes. Proof positive of this trend--and a new, favorite tool of fund managers and such--is the formation of investor-led conference calls aimed at communicating with executive management.  Headed up by independent moderators and involving up to hundreds of institutional shareholders, these calls unite large-share investors looking to become more proactive in guiding corporate decision-making. According to a recent BusinessWeek article, there are three fundamental ways institutional investors are using such forums to usurp executive power: ● Empowering Dissidents by reaching more investors and swaying more votes than what more traditional letter-writing or ad campaigns could accomplish. ● Seizing the Agenda away from CEOs who are accustomed to controlling all aspects of quarterly earnings conference calls and shareholder meetings. ● Speeding the Process of providing feedback to executive management while also crystallizing the opposition, which in turn pressures executives to respond more quickly. Companies and executive management recently subjected to such investor-led actions include Disney and with head mouse Michael Eisner as well as MONY Group and its CEO Michael Roth.  The format of such conference calls usually allow for professional investors--those either running funds or owning sizable sets of shares--to e-mail questions to the moderator before and during the conference call.  Unlike those presented during earnings conference calls, these questions carry less of the sort of respect and consideration normally found and are a bit more in blunt nature in order to extract very clear answers: "Why is one person both CEO and Chairman of the Board?" "Why is the pay package for this executive so excessive?" "On whose authority did you decide to spurn this takeover proposal?" While one option available to CEOs is to decline invitations to participate in such calls (MONY cited that it preferred 'one-on-one investor meetings' and planned to run its own call later in the week to 'update shareholders'), the better bet is, most likely, to go with the flow and participate in an amicable manner in hopes of restoring strained relationships.  And--just in case you're wondering--the SEC does permit such shareholder actions to communicate with a company's executive management. So if you find your chief executive being called on the carpet, consider these tactics to make the most of an uncomfortable opportunity: 1) Remain humble and open-minded. Clearly, some major investors feel bent out of shape, whether justified or not.  Encourage your CEO to listen to his critics, communicate his empathy, and ask questions that ensure he fully understands their guidance.  Asking questions won't position your CEO as weak if used properly--instead, it'll demonstrate his ability to reflect on potential actions and willingness to work with key investors.  It's silly to project the CEO as someone focused on an inarguably ideal strategy...a wise CEO will always convey his consideration of thoughtfully developed alternatives. 2) Make friends. This may sound a bit odd at first--trying to make friends with an active and ongoing adversary.  But think about human nature: it's normal for anger to grow towards an individual while outside their presence, but as soon you're around them again, you suddenly find yourself much kinder in thought and action.  By communicating with someone and working to build bridges, you're hedging the anger-when-out-of-a-person's-presence effect. So, rather than entering the call in a confrontational manner, a CEO should work to restore relationships with adversaries.  These folks most likely won't go away any time soon, either...such adversarial investors are typically a group with whom management will have to relate for a long time to come.  When possible, either during, before, or after the conference call (probably the latter two options), try to segue conversations onto topics of common interest: same alma mater, children of similar ages, the CEO having visited an investor's home town, frustrating golf scores, etc...  Rule number one in diplomatic negotiation is to agree on the smaller matters first to help build momentum and a track record of success while heading toward larger, hairier issues.  The same goes for CEO-investor relationships--begin negotiations, so to speak, with as much in common as possible. 3) Articulate clearly and leave no stone unturned. No doubt, the audience with whom your CEO will speak are no dummies, and they will enter the call expecting straight answers.  With careful planning, expect for your CEO to provide crystal-clear responses that don't hedge, spin, or obfuscate--most likely, your investors feel that they have had enough of such tactics and won't settle for them anymore. It is to your advantage to distinctly express and exhaust all answers while leaving no stone unturned.  Not only are you satisfying their curiosity, but you're most likely nipping in the bud investors' propensities to further consider related but tangential matters that could later enter into the conversation.  Consider your teenage son who arrives home late after curfew: if he proactively explains to you how the car broke down; he had to get a tow ("By the way, here's the receipt."); and express his remorse to his girlfriend's parents ("Feel free to give them a call--here's their phone number."), then you're more than likely going to ignore the lipstick on the shirt collar. CONCLUSION Nobody's saying such tenuous circumstances are easy, but they are navigable and survivable.  With any bit of luck, your CEO may even end up ahead...just keep these three rules in mind and stay the course.  And don't forget to circle back with your own conference call at a later date in the near future, armed with the sorts of information that you now know investors want, in order to proactively demonstrate your goodwill.

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