FOR every new securities rule, there seems to be an unintended consequence. But one set of rules — the US Securities and Exchange Commission’s (SEC) E-Proxy requirements – has had more than its fair share of negative outcomes.
Not only has E-Proxy been responsible for a huge drop in retail shareholder voting at annual shareholder meetings and left many uninformed about their stock investments, but a single phrase in the adopting release may be contributing to US companies providing less usable online annual reports and proxy statements than companies in other leading markets.
That phrase is “prohibition on cookies,” which the SEC uses in its 2007 adopting release (PDF 424 KB, 72 pages) for Rule 14a-16 requiring companies to post their shareholder meeting materials online. The phrase is used when discussing the requirement that companies post their materials on a website that “does not infringe on the anonymity of a person accessing such Web site.”
However, it appears the phrase “prohibition on cookies” is based on a common misconception that cookies are only used to identify and track people on the web. It ignores the fact that they do not by default infringe upon users’ anonymity and often are needed to provide improved functionality and tools that benefit investors.
In fact, taken to its extreme, companies that currently provide Flash video on websites where they host their proxy materials are in breach of the rules because Flash content typically uses a cookie-like technology called Local Stored Objects, which remembers things like a user’s preferred volume settings.
While I have previously pointed out that the SEC’s intent was only to preserve users’ anonymity and not to issue an outright ban on cookies, it is of little consequence because the SEC’s language has now been taken at face value by companies and their counsel. All who I speak to believe they cannot use any cookies at all.
Preventing improved usability
The apparent ban on cookies may be contributing to US companies lagging their counterparts in other markets when it comes to the usability of their online shareholder materials. According to research conducted last year by online corporate reporting specialists Nexxar, only 20% of the Dow 30 companies provided a full HTML annual report in 2010. That compares with 41% of the UK FTSE 100 companies that did so, and 53% of Germany’s DAX 80 companies.
Additionally, well-meaning companies that want to provide their annual reports and proxy statements online in formats that use advanced usability features — such as print baskets, download managers and note savers – are unable to do so because these tools typically rely on anonymous cookies to work.
Most non-US companies that provide online shareholder meeting materials use web analytics software to measure the effectiveness of their reports and understand what information investors are most interested in. Alberto Zambolin, CEO of Italian online corporate reporting agency Message, recently recounted a story to me of a client who identified high levels of traffic to a specific footnote in the company’s online annual report. The company then increased its disclosure about the topic in its next quarterly report and added information about it in its investor presentations. That’s a win-win for investors and companies.
Undermines SEC’s usable documents requirements
Of course, it’s doubtful that many US companies would provide better online reports even if they knew there wasn’t a blanket ban on cookies. Few follow the existing usability requirements contained in the rules. However, one phrase based on a misconception – or simply poor word choice — shouldn’t be creating an arbitrary barrier to well-meaning companies that actually want to improve the usability of their online documents.
The current situation is unfortunate because the SEC went out of its way in the E-Proxy rules to encourage companies to improve the usability of their online annual reports and proxy statements. I believe Rule 14a-16 marked the first time the commission addressed online usability by requiring shareholder meeting materials to be “presented on the Web site in a format, or formats, convenient for both reading online and printing on paper.”
There are many aspects of the E-Proxy rules that need to be addressed, but this one is easy to fix.