SEC's "notice-and-access" model is a mess

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THIS new “notice-and-access” model that the Securities and Exchange Commission in the U.S. introduced for annual reports and proxy statements a couple months ago is not working out.

Shareholders — and here I’m thinking of those middle Americans trying to hold down a job, raise kids, build a life, and hopefully a nice retirement — are being screwed over by big businesses that either don’t understand or don’t care about their audience’s needs.

Some big companies like Sun Microsystems, Microsoft, Nike and Sara Lee have decided to take advantage of the “notice-and-access” model. This is where they send a notice to shareholders in the mail and tell them go online to get their annual reports and proxy statements, or order printed materials via mail.

This system puts the onus on investors to make an effort to get the information. It’s inherently more of a burden on shareholders. The information doesn’t just come in the mail. They have to do something to get it.

I don’t mind that part of it one bit. I don’t think you should waste money or resources sending stuff to people who don’t want it. But I have a problem when people make the effort to go online and then are given crap to read, stuff that companies would never use in any other setting.

Fuzzy text, tiny type and finicky drop-down menus

Why is a company like Sun Microsystems, which likes to think of itself as being on the cutting-edge of disclosure technology, posting its annual report in 160 images instead of simple HTML? I don’t know. But it sure isn’t good practice.

It’s nauseating after a while trying to read the fuzzy text in the images. You feel like there’s something wrong with your eyes. You start seeing double. And this is from the company that once wrote the book on how to write for the Web.

And the drop-down menu that is provided for you to navigate to a section of the document is so long and finicky that I kept losing my place. And then it just stopped working and I couldn’t get out of the notes to get to the summary compensation table in the proxy. When I finally shut it down and tried again, I couldn’t read the small type in the footnotes to the comp table. Go on, Jonathan, you try. (Oh, and just for fun, give that drop-down menu a whirl on a laptop with a touchpad.)

Even worse is that Sun’s image-based annual report and proxy statement claims to have an accessible version. There’s a link at the top of the screen that says “Accessibility Features,” which means there is a version that supposedly is designed for blind and other disabled users who rely on screen readers.

But that’s a complete sham. Clicking on “Accessibility Features” gives you a page prompting you to download a PDF. I have news for Sun. That PDF is not even remotely accessible. It’s not even tagged, which everyone knows is a prerequisite to making PDF accessible at a rudimentary level. And even if it was tagged, it probably would not be accessible because tagging does not actually mean that things like data tables will make sense to a blind person using a screen reader.

Any claims that Sun’s proxy statement and annual report are accessible are flat out lies. How can a company lie in connection with its annual report and proxy statement?

Broadridge Financial Solutions is a big part of the problem

To be perfectly clear, Sun’s online annual report and proxy statement are produced by Broadridge Financial Solutions, which slaps together hundreds of these image-based documents each year. It is Broadridge, which was spun off from ADP earlier this year, that is lying about providing accessible documents.

In fact, they’ve even made up something called “ADA approved” (see image below) suggesting that the U.S. Department of Justice, or one of the other government departments with Americans with Disabilities Act jurisdiction, has approved their product.

Not so. And it’s actually disingenuous of them to claim as much because the ADA does not explicitly apply to the web. Of course, now that Broadridge claims that it does, they’ve just invited the DoJ in to have a look around. Geniuses. At minimum, Broadridge owes its clients an apology for false advertising.

Of course, if they can produce a shred of evidence that anyone with ADA enforcement powers has actually approved their product, I’ll apologize to them…. It will be a long wait.

Bad formats discourage informed investing and voting

But all of this stuff about accessibility to disabled web users is not the main issue. The real issue is these unusable image-based documents. Where else does Sun use image-based documents in its communications with stakeholders? Answer: only with its shareholders. Something is not right with that picture, or should we take it that Sun doesn’t think its shareholders matter?

Image-based documents are a barrier to people informing themselves. They are an impediment to investor protection in the United States. People are not going to read these documents because they’re simply not readable. Go on, Chairman Cox, you try.

It’s the same as permitting companies to print their annual reports and proxies in 6-point gray text on off-white paper. Would they permit that? No, they wouldn’t. And unless the SEC does something to end image-based documents, they are contributing to the mass ignorance and complacency of investors.

Ignorance and complacency can bring the entire system down. That’s what the current crisis in the money market is about. Smart people who should know better have no clue what they’ve been buying because it was either too hard or they were too lazy to figure it out. And they’re the pros. It’s their job to figure this stuff out.

Regular investors are severely handicapped as it is, and image-based documents give them no chance to make informed investing or voting decisions because the documents make it too hard to do so.

OK. Next!

Microsoft’s IR department lets the company down

Microsoft. This may be worse than Sun. They just throw money around, these people. Even though Microsoft produces its own HTML annual report and barely usable HTML proxy statement, they’ve needlessly paid to have the very same documents duplicated by their transfer agent in — you guessed it — images.

The left hand doesn’t know what the right hand is doing at Microsoft. Their IR department makes the company look utterly incompetent. Right now, for instance, there are broken links to the annual report and proxy statement on the company’s IR homepage. Someone slapped up the links on Friday then went home without testing them.

The links to the annual report and proxy on Microsoft’s investor relations homepage were broken for the first two days after being posted.

There are 10 people in Microsoft’s IR department, if I read the last paragraph on this page correctly, and none of them stopped to try the links to the annual report and proxy statement on their homepage before heading home for the weekend. How hard can it be to check a link you’ve just posted at the top of your IR homepage? Yeah, I thought so.

But take a look at the documents Microsoft is telling its investors to access when they receive the “notice of Internet availability” in the mail. Instead of going to Microsoft’s website, they’re told to go to http://mellon.mobular.net/mellon/msft/

Below is the summary executive compensation table as users will see it on the above mentioned site. That’s the actual size it appears at in the default view. If you’re psychic, you might think to click on the page to zoom in. But that’s an extra click for no good reason.

This is the actual size of the summary compensation table at the default setting.

Now lets say you were viewing the Director Compensation information just before going to the Summary Compensation Table above, and now you want to go back to the previous page. Don’t use your “Back” button because that will take you out of the annual report and proxy statement completely.

They’ve broken a fundamental convention that everyone who uses the Web knows intuitively — that when you click the “Back” button, you go back to the previous page, not to the previous website.

And I haven’t even begun yet to explain all the reasons these documents are unfit for human consumption. Microsoft has enough of its own usability experts to explain that to the IR department.

Which raises the question of why the world’s biggest software company and one of the biggest players on the Internet is relying on some virtually unknown entity to host its proxy materials? There is absolutely no reason why Microsoft couldn’t have sent investors to a page on its own website. From there, investors could be directed to the HTML annual report and proxy statement that Microsoft provides, and to the online voting facilities for registered and beneficial shareholders, which is actually the only thing that should be outsourced.

Faint hope dashed by more untruths

Next stop Sara Lee. I had a glimmer of hope when I saw that the notice they’re sending to registered shareholders actually sends people to the company’s website at www.saralee.com/annualmeeting , an easy URL to remember. Even better, they use a little URL redirection trick to get people to the actual, longer URL. Hey, someone was actually thinking about this stuff. (update feb/2008: I was too kind. Sara Lee inexplicably has removed its annual meeting page!)

Alas, it didn’t get better from there. Sara Lee tells untruths about its documents just like Sun does. That’s because they both use Broadridge for their annual reports and proxy statements. Only Sara Lee demonstrates its ignorance of all things Web by calling the Broadridge image-based documents “HTML” (Sun uses the euphemism “interactive report”).

Image-based documents are not HTML. If anyone sold them to Sara Lee as such, the company should ask for its money back. And, again, Sara Lee’s reports also claim to have “Accessibility Features” for the blind, which, again, is a lie. They’re not even usable for sighted people with high definition monitors like me. I can only just make out the footnotes on this page if I really concentrate.

I’m going to stop ranting now and just say what needs to be said. Everyone involved in this mess, from the SEC to Broadridge to the companies themselves would do a lot better if they actually gave a damn.

Dominic Jones

Dominic (bio & disclosures) is IR Web Report‘s founder and an online investor relations consultant. He advises leading public companies and investor relations service providers worldwide on using the web for disclosure, engagement and profile building. You can contact him via the contacts page.