By Dominic Jones
THE U.S. Securities and Exchange Commission’s concept for an electronic forum where shareholders can discuss and possibly vote on corporate governance issues is too prescriptive and costly, and will mostly benefit a small group of vendors only.
At their roundtable on proxy access in May, the SEC floated the concept of an electronic forum in a briefing paper. This proposal is similar to our January 2005 concept of a Board of Directors Blog through which boards can post updates on their activities throughout the year and ask for input from shareholders.
Both the SEC’s forum proposal and our original board blog concept envisaged restricting participation to verifiable shareholders of a company. But we’ve changed our minds about that limitation. We now believe that there should be as few restrictions as possible on who can participate.
While in principle we believe directors of public companies are accountable chiefly to shareholders, we also believe directors would not be acting responsibly, and the value of a forum- or blog-based discussion would be severely diminished, if they did not also seek input from other constituencies. Participation should be open to consumers, non-governmental organizations, employees, customers and anyone who believes they have a stake in how companies are governed.
In its briefing paper, the SEC also envisages that the forum would be anonymous. We disagree that this should be a requirement. Objecting beneficial owners, people who don’t want their identities known to companies, probably would have little interest in engaging boards directly. But if they do want to participate, then they must come out of the shadows, something that will please many companies who complain about not being able to identify who their shareholders are.
Anonymity is a detriment to open and transparent discussion. It makes people less accountable and it doesn’t enable other participants to gauge the credibility or profile of a particular participant. If someone has something they want to say to a board, other shareholders, and the world at large, then they should put their names to it.
Costs, control and loss of influence
The SEC’s proposal to ensure anonymity and restrict access to the forum only to shareholders would require companies to put in place expensive computer systems. In fact, it would be practically impossible for them to create a forum and verify each participant’s ownership status without going through Broadridge Financial Solutions Inc., the former ADP brokerage services arm that went public earlier this year.
Broadridge effectively controls access to companies’ Street Name shareholders. It would likely be the main beneficiary of the shareholder forum proposal if it moves ahead in its current form. In a letter to the SEC, Richard J. Daly, Chief Executive Officer of Broadridge, said his company could implement a shareholder forum as envisaged by the SEC. However, he stopped short of endorsing the concept saying Broadridge did “not have a view on the relative merits of such policy for issuers and investors.”
According to Institutional Shareholder Services’ Corporate Governance Blog, participants in the SEC roundtables were mostly skeptical of the forum concept. They feared it might be used to replace the current non-binding proposal process, while others said investors would not trust such a forum if it was controlled by the company or if it devolved into a typical chat room.
I agree that any online communications mechanism — be it a blog or forum — should not replace non-binding proposals, but I also believe that more open discussion between boards and stakeholders would likely reduce the number of such proposals going forward to annual meetings. That is the main reason for companies to use forums, blogs and other mechanisms for engagement.
Concerns about investors not taking the forum seriously, or it not being trusted because it’s controlled by the company, are unfounded when it comes to what we have seen and experienced on blogs. Yes, blogs are informal and people can get carried away at times, but the discourse is mostly civil, informed, and very often enlightening.
Furthermore, blogs are inherently trustworthy due to the fact that it is impossible for any one party to monopolize the discussion. Through trackback technology, commenting mechanisms, RSS feeds and feed aggregators and search engines, any party who feels a company is not permitting their views to be heard can create their own blog for free and easily let others know their position. For instance, their blog posts could show up on Google Finance’s page for the company, where other shareholders can see them.
We need the SEC and other regulators to provide clear, practical guidance that enables and encourages freer discussion on the Web between boards and shareholders. Trying to prescribe or restrict the mechanisms and format for the discussion will hinder innovation. An anonymous forum may be an option, but so should be a board blog, or a counter-motion mechanism, or a message board. The choice of what online mechanism to use should be left to companies and individual shareholders to decide.
All that shareholders and companies need to know is that they’re not breaking any laws or rules if they start a blog, a social network, or some other mechanism designed to foster freer dialogue on corporate governance issues at a particular company. And they need simple ground rules for what is permissible and fair in such debates.
I know full well that very few boards in the world are eager to start blogs or forums to engage their shareholders and other stakeholders. However, those that want to shouldn’t be held back.
Update: On July 26, 2007, the SEC posted proposed rules (PDF 376 KB, 96 pages) for comment that includes more on shareholder forums. The commission is leaving the choice of mechanism and format to companies and shareholders to decide, while providing clarity on the legal framework and ground rules for such forums. This is exactly what we need. Of course, this is such a new concept that many of the potential issues and problems probably can’t be foreseen until we have some experience with these types of tools. But the SEC has done well to remove some of the initial barriers to companies and shareholders using the Web to talk about issues of mutual interest.
Related items on this topic:
AMERCO’s shareholder forum, e-proxy (July 11, 2007)
The emerging engagement expectation (July 06, 2007)
Pfizer starts summits with (some) shareholders (June 29, 2007)
Why corporate boards should blog (January 11, 2005)
I like the idea of board blogs and of course making the directors of public companies more accessible (and accountable) to stakeholders.
I wonder what effect this would have a few years from now on further narrowing the pool of individuals willing to serve as directors of public co’s? Already this pool was reduced after passage of SOX and instances of directors being held personally liable. Regardless of what guidelines are put out there by the SEC, as you know, very few BODs and their counsels are going to want to go above and beyond in any way to “stick their necks out” unfortunately.
Still, agree this could make sense for the “brave and the few.” re: clear guidelines.
Any idea of how many CEOs of public companies are regularly blogging today? SUNW CEO of course always used as example, Meckler CEO of JUPM has also been blogging for several years.
Have a nice weekend-
Hi Matt,
Not many CEO bloggers yet. Tom Glocer at Reuters has a good one. Bill Marriott’s is also good.
The way I see this working is like this: Let’s assume the compensation committee at Home Depot wants to revise its CEO pay package. It’s gotten advice from consultants and made a few calls to a few big institutions for their views. But they want more input on their plans. What do they do?
With a blog, they could post an item saying they’re thinking about overhauling the pay system and outline what they’re thinking of doing. Then they can ask for input on specific issues. People with ideas can post them as comments, and everyone can see what they said.
Free advice for the committee and a way to be alerted to any issues that could potentially cause problems. They take what they learn from the input and everyone is happy.
I don’t see how this adds any risk. If anything, it reduces it. But until the SEC says there’s nothing stopping a board from doing this or provides some guidelines on when a board can exclude comments etc. it’s not going to happen.
I don’t believe that blogs for Boards are practical…first, who answers for the Board? There is not ‘one voice’…some directors would choose not to blog others might. What about the disclosure issues….managments in my experience often can’t remember what is in the public domain…and who speaks for the organization…the board or management? I don’t see it practical to float something like a change in compensation to a blog…I think something of that importance and magnitude should not be discussed in a non-transparent blog..it would surely in my view have more potential to increase volatility not lower risk.
Given the number of executives currently blogging, I doubt directors would ever want to…also what about the issue of timeliness…a director, which is a part-time position now would potentially be 24/7…blogs would end up much like the chat boards…retail investors who are too often clueless.
Jim,
Obviously I don’t agree with your views, but thanks for saying what most people probably think.
But to answer your questions:
1. Who answers for the board? The board as a whole, the chair and the chairs of committees. It’s a simple matter of process that needs to be clarified. I don’t see directors going on to the blog to post whatever and whenever they like. But if a board thinks that’s OK, then let them do it.
2. Disclosure issues. Again, unless directors are complete morons, this isn’t going to be a source of selective disclosure, particularly because the topics will mostly relate to governance policies and practices.
3. Who speaks for the organization? Management serves at the pleasure of the board, which serves at the pleasure of the owners i.e. the shareholders. Unfortunately, too many have forgotten this little chain of command and hence shareholders are mostly voiceless. I think blogs would rectify that to some extent by giving any shareholder a voice.
4. Compensation shouldn’t be discussed on a “non-transparent” blog. I don’t get how a blog in the public domain is “non-transparent.” What’s not transparent is sitting behind closed doors and making decisions about pay with little or no input from shareholders who are footing the bill. Meeting with a few big shareholders, who might earn equally outrageous amounts, to get their buy-in also is not transparent. Open up the dialogue. Tell people what you’re doing and see what they think.
5. Volatility. When did more information result in greater volatility? Can you point me to a single study that has found that is the case?
6. Work load for directors. The work involved in posting something on a blog is less than preparing and then meeting with a group of institutional investors. In fact, I predict it will reduce workloads for directors. Annual meetings will be shorter, and there’ll be fewer shareholder proposals to debate.
7. Blogs would be chat boards. While it could happen, experience with blogs says it mostly will not. Comments can be moderated.
8. Clueless retail investors. Anyone who takes the time to provide their two cents to a board is worth listening to. “Clueless” retail investors included.
What I see when I look at the corporate governance landscape is a huge gaping chasm between shareholders on the one side and boards and managements on the other. They don’t talk to each other. I’m a believer in communication as a way to bridge divides and create a meeting of minds. In the end, we all have the same interests at heart: the success of the corporation.
The only people who should be afraid of better communication are those profiting from the conflict…
[...] are just because that’s how they’ve been for the past 50 years. As I wrote recently in a comment to an IR consultant on this blog: ”The only people who should be afraid of better communication are those profiting from [...]
[...] I will write more about this at another time, but on first reading the proposals impressed me as being innovative and non-prescriptive on how forums should be run or what technologies companies and shareholder can use. Essentially, the SEC is trying to get out of the way of companies and shareholders talking to each other online, while providing clear guidance on the legal issues around such forums, which is what I was hoping for. [...]