Shareholder Communications and Investor Relations

Technological innovation could revolutionize shareholder communications and provide faster, better and cheaper information to shareholders and analysts.

Proxy season 2006 arrives on the eve on an SEC-led technological revolution. Just over the horizon, companies may enter a new world of shareholder communications with faster and better information for investors and analysts at lower costs. For now, though, companies will need to contend with low-tech solutions to formidable challenges, including how to analyze their investors base and hold the line on earnings guidance and fair disclosure practices.

Investor Bases

Companies and shareholders may want to know a few facts about the investor base, especially at a time when shareholder activism is reported to be at its highest since the 1980s era of corporate raiders and "Barbarians at the Gate."

As activist shareholders are exerting pressure on management to the point of attempting to oust directors who side with management, the types of useful information about a company's investor base might include facts about the types of investors who own stock in the company, the voting history of these investors, and the issues likely to be foremost on the minds of any dissident investors.

The identities and email addresses of dissident shareholders would be especially helpful since management might want to reach out and communicate directly with these and other investors on the issues. But gaining access to shareholder contact information is easier said than done in the U.S. Approximately 80% of shares are held in "street name," meaning, they are registered in the name of the broker or dealers through whom the shares were bought.

Currently, the primary means by which companies communicate with shareholders is by printing bulky proxy statements and annual reports, then sending them through low-tech delivery systems. This is costly and slow. If a broker holds the shares in street name, the company's printed materials must pass through the broker.

The SEC's December 2005 proposed rule on "Internet Availability of Proxy Materials" could bring big changes to this system. The SEC has proposed that companies be allowed to post their proxy materials on their Web sites instead of printing and mailing the documents. These e-proxies could open the way for companies to obtain direct access to email addresses and other information about their shareholders and investor mix.

Some aspects of the SEC's proposal are controversial. Activists and dissident shareholders feel they should be free to communicate directly with shareholders too. Supporters worry the complexities may lead the SEC to delay the rules or phase them in over time. Until electronic proxies are sufficiently operational, companies will still need to conduct costly market studies to analyze their investor bases, and they will need to communicate with shareholders indirectly.

Earnings Guidance

Companies communicate more directly with securities analysts through conference calls and briefings that help the analysts gauge the company's value and forecast its future results.

In prior years, this interaction has typically involved the providing of earnings guidance. But studies show companies continue to cut back on earnings guidance provided to investor and analysts. A survey of its members by the National Investor Relations Institute in March 2006 found:

• " The percentage of publicly traded companies giving out guidance dropped to 66% from 71% in the prior year.
• " Among those companies that continue to provide guidance, the nature of the guidance has changed. The percentage giving quarterly guidance fell to 52% from 61% a year ago, while the percentage giving annual guidance increased from 61% a year ago to 82% today.

In addition, SAB 107 notes that the adoption of Statement 123(R), as well as changes to share-based payment arrangements that many companies are making, may affect the comparability of financial statements. Accordingly, SAB 107 encourages Management Discussion &Analysis (MD&A) disclosures to help readers understand how these changes affect the financial statements. We examine this point further in a subsequent section. For the complete text of SAB 107 refer to http://www.sec.gov/interps/account/sab107.pdf.

Regardless of their policies on earnings guidance, however, many companies provide analysts with other information. Increasingly, the trend is to provide a wide range or "dashboard" of financial and non-financial measures.

The reasons for these trends are not entirely clear, though many blame it on today's legal and regulatory environment, charging that companies may be afraid of the adverse consequences of releasing information that could be construed as misleading. Others blame the chilling effects of the SEC's Regulation Fair Disclosure (FD).

Fair Disclosure

The SEC's Regulation FD is a well-intentioned effort to level the playing field between analysts who get information directly from companies and shareholders who get their information indirectly.

Basically, the rule prohibits selective disclosure of material non-public information to one investor or selected groups of investors. But critics of the rule say it has chilled spontaneous communications, and the rule has proven difficult to enforce.

In September 2005, a federal judge ruled against the SEC and dismissed a lawsuit based on Regulation FD, saying the SEC was applying the rule in an "overly aggressive manner." (SEC v. Siebel Systems)

XBRL and Interactive Data

Faced with practical difficulties but unwilling to give up on its objective of fair disclosure, the SEC has taken an innovative approach that centers around technology and interactive data. This technology may empower companies to provide more types of information electronically, thereby easing the calculations done by analysts and achieving the goal of fair disclosure by making the information available to individual investors at the same time.

The centerpiece of this technology is XBRL (eXtensible Business Reporting Language), a way of tagging data that helps third parties, (such as banks, investors, analysts, credit companies) make comparisons of companies with competitors, across industry lines, and within market groups or indices.

Some companies are already using XBRL. To expand the number of participating companies, the SEC is offering incentives to companies to participate in voluntary reporting programs. These incentives include faster reviews of annual reports and registration statements.

Companies have other incentives to use XBRL. Some companies whose results are already reported in XBRL by third parties (such as companies in the Russell 3000 whose XBRL reports were made available through a leading EDGAR service provider) have said they would prefer to control the tagging to ensure there are no mistakes.

In addition, experts say XBRL may benefit smaller companies (microcap companies) by helping them to attract an analyst following. Coverage by analysts has been equated with lower volatility in stock prices and higher market capitalizations.

Because XBRL technology is not widely understood, shareholders may have questions about its cost, availability, risks and benefits.

Continue Reading - Shareholder Questions on Timeless Topics

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