JUST over a week ago, Securities and Exchange Commission (SEC) chairman Christopher Cox gave an important speech that has so far gone unreported by the investor relations profession’s main associations and trade press.
In his closing remarks to the Second Annual Corporate Governance Summit at the USC Marshall School of Business in Los Angeles, the top US securities regulator issued a bold call to action for companies to make their disclosures more retail-friendly, put an end to “over-lawyering,” and embrace new technologies and the Web.
|Chairman Cox: Investors deserve better|
Using our recent readability tests of pay disclosures to illustrate how convoluted investor communications have become, Cox criticized companies, lawyers and even regulators themselves for churning out disclosures that are “too long, too dense, and too hopelessly unintelligible for retail investors to decipher in the necessarily limited time they have.”
War on complexity
The SEC chairman said his agency is “waging an all-out war on complexity” and using technology as a way to improve access and ease of use.
“The SEC is dead serious about shedding 70 years of accumulated bad habits in writing,” said Cox. “We are well aware that our retail disclosure system has devolved into a self-serving exercise for issuers, underwriters, and their lawyers. No company that serves retail customers would seek to draw their attention to important subjects with an 80-page doorstop. Nor should we, if we are to continue to deserve our title as “the investor’s advocate”.”
The chairman’s remarks are a clarion call for business communicators. They signal that a radical shift is now required in how companies communicate with investors. Increased emphasis on the Web and on retail investors requires a change in thinking by boards, executives and their IR departments. They also must ensure they have the tools, resources and processes in place to manage their online communications effectively.
Tapping the power of technology
Cox outlined several areas where the SEC is “tapping the power of technology to bring higher-quality information to investors more quickly and more easily than ever before.” They include:
E-proxy process. The e-proxy process, which will enable companies to next year deliver their shareholder materials primarily online instead of print, would allow investors to experience the “full potential of interactive” disclosures, Cox said. As I wrote back in February, the e-proxy rules require companies to provide their annual shareholder materials in both Web-optimized and a printable format like PDF. This is significant only because, despite what they may claim, most companies do not pay attention to how their shareholder materials are formatted or presented on the web. It will not be difficult or costly for companies to meet the requirement for HTML versions of their disclosures, but it will require them to change their thinking about how they communicate.
Electronic Shareholder Forums. Internally, the SEC is discussing the concept of allowing the Web to be used as a mechanism for shareholders to communicate amongst themselves. Although this topic was also raised by Commissioner Roel Campos at the SEC meeting that approved the e-proxy rules, it’s not exactly clear to me what the SEC is considering. Campos indicated in his remarks that the online forum could be part of the annual meeting proposal process. This may be an area where new social networking technologies could be effective. Two years ago, IR Web Report highlighted how cheap blogging technology could be adapted as a mechanism for board-shareholder and shareholder-to-shareholder communication. I’m also aware of at least one company that is creating a new platform tied to shareholder meetings and that they have discussed this with the SEC.
Interactive Data/XBRL. Chairman Cox again stressed the importance of using technology as a way to help investors more easily crunch and compare corporate and other investment data. During his speech, he demonstrated how by tagging the information in compensation tables, investors can easily and quickly view information using different pay formulas or compare pay items across many companies. As we reported last month, the SEC is developing a prototype interactive pay database using data from several hundred of the biggest US companies. The SEC is also putting over $50 million into upgrading Edgar and developing a full XBRL tagging dictionary for U.S. GAAP.
“These changes are remaking the very nature of communications between companies and investors. Whether in periodic reports, or proxy solicitations, or any other investor communication, our overarching goal is to make disclosure more accessible and more useful to investors,” said Cox.
Covering their backsides, not informing investors
However, the SEC Chairman also said he recognized that the “omnipresent threat of litigation” was partly responsible for dense and convoluted disclosures.
He said that because of legal risks “the main purpose of the drafting exercise has shifted from informing investors to insuring the issuer and the underwriter against potential claims.” Consequently, he said, the jargon of lawyers has taken over.
Although not explicit, that comment would seem to suggest that Cox supports taking steps to limit damages and set stricter requirements for shareholder law suits against companies.
However, he also indicated that in the case of dense CD&As, companies were starting from a blank slate and so had less of an excuse for not producing readable disclosures.
How companies should respond
It seems pretty clear to me that IR departments are under the gun to strengthen their communications capabilities, particularly when it comes to the Web. From my vantage point where our firm reviews large companies’ IR websites every working day, I’m certain that many companies are going to wake up one day and find that they’re in over their heads.
Currently, most boards, executives and IR departments are almost universally focused on a few big institutional investors and analysts. They’re not interested in less-glamorous retail investor communications, or at least don’t demonstrate much interest.
Another challenge is that the vast majority of IR departments lack web communications expertise. After years of outsourcing their Web communications, many IR teams have become overly dependent on big cookie-cutter IR website hosting services like Thomson Financial and Shareholder.com, which themselves are out of touch with best practices and severely hamstrung by inflexible business models.
Going forward, U.S. companies should take a leaf from their European counterparts and create strong internal Web communications capabilities. I have written about that approach here.
Another option would be to work with smaller website vendors that can provide IR departments with greater flexibility, responsiveness, expertise and service. There are many such companies in all major cities.
Unfortunately, most of them have been locked out of the IR space by big vendors for so long that they may lack experience with IR sites and practices. However, I still regard them as a better option for companies that need to strengthen their online communications capabilities. In a few months, IR Web Report will announce initiatives designed specifically to support these smaller web communications firms and their clients.
An opportunity, not a burden
Communicating effectively and embracing new technology so that anyone is able to access, assimilate and analyze corporate information is not a burden. It is an enormous opportunity. It will attract more people to the capital markets, which in turn will help to give wing to new enterprises and lower the cost of capital for incumbents.
It will create a more dynamic and trusting environment for business leaders. Through two-way communication between companies and their broader constituency of shareholders, companies will be better able to understand what they must do to earn that all-important “license to operate” in a world suspicious of management.
Greater participation in corporate governance by more parties will also reduce the risks of undue influence over corporate affairs by special interests. This is because newly empowered retail investors are likely to be active participants in companies’ governance, if they are invited in.
And most importantly, new technologies and clearer communications will enable individuals to make better, more informed investment decisions appropriate to their life circumstances and risk tolerance.
Investor relations practitioners have a choice. They can be nannies for hedge funds and renters of stock, or they can do something good with their positions. You know where we stand.