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)