It’s been a year-and-a-half since the Securities and Exchange Commission codified requirements that companies disclose information regarding shareholder communications with directors, including whether a company has such a process, and whether the communications are screened.

And though most companies have not modified the processes they originally instituted, a review of recent proxy statements shows that some companies appear to be fine-tuning their existing director communications policies and procedures.

Berkenblit

"Very little changed this year in the proxy statement," says Sullivan & Worcester partner Howard Berkenblit. That view is verified in a Compliance Week review of proxy statements.

In its latest proxy, for example, $9.8 billion Progress Energy printed a two-paragraph description titled “Communications with the Board of Directors,” which was unchanged from 2004. The section listed the mailing address of the general counsel, and included a note that the company screens mail sent to the board "for security purposes and to ensure that the mail relates to discrete business matters that are relevant to the Company." Mail that satisfies that screening criteria is then forwarded to the appropriate director.

The board communication policy at $10.6 billion Amgen also showed no change from the previous year. The same was the case at Johnson & Johnson, which listed a mailing address and corporate Web site links to related information describing the shareholder communications process. And Pepsico’s statement contained a paragraph referring shareholders to the “Contacts” section of its corporate Web site; this paragraph remained unchanged from the previous year.

“The vast majority [of proxy statements] have not changed," reiterates Berkenblit. "Many companies put a lot of thought and planning into it when they first came up their policies a year ago.”

More Screening

There are exceptions, of course. And though approaches to the director communications rule still vary, some companies have made subtle policy changes after making it through the first year of compliance. "Last year, companies just had to put the information out there," says Berkenblit. "Now, there is less ‘SOX exhaustion’ with content. Companies have more time to tweak their presentation and make small changes.”

General Electric, for example, made changes not to its policy, but to the description of that policy, changing tense—from "communications shall be promptly reviewed" to "communications are promptly reviewed—and broadening the inclusion of issues by applying the policy to "concerns," not just "complaints."

Morgan Stanley also broadened the relevance of its policy from just “shareholders” to “shareholders and other interested parties.”

Williams

The screening process was one that seemed to get tweaked by several public companies.

For example, $3.9 billion electricity and gas company Scana Corp. noted in this year's proxy statement that its corporate secretary may review communications first, transmitting only a summary to directors if appropriate, or eliminating those that are not relevant. According to the proxy, the corporate secretary—a position currently filled by Lynn Williams—has discretion to exclude from transmittal "any communications that are commercial advertisements or other forms of solicitation or individual service or billing complaints." The corporate directors, however, have the ability to review all communications at their request.

Berkenblit at Sullivan & Worcester notes that the screening of communications should be considered based, in part, on the volume of communications and the size of the company. If practical to review communications on a case-by-case basis, companies should consider the policy. “It’s easy enough to screen their communications,” says Berkenblit. However, he also warns that the process may be more difficult to manage at small- and mid-cap companies, and that executives and directors should carefully consider taking on the burden—once screening has begun, it may be a difficult policy to reverse. “If it ain’t broke, don’t fix it," he warns.

Marketing Transparency

A number of companies have fine-tuned their presentation of communications policies, describing procedures in language that is more accessible and "plain English." Experts note that's a trend that syncs well with the general emphasis on transparency and shareholder comprehension.

Smith

“Since the SEC finalized rule 3235 [which governs disclosure regarding communications between security holders and directors], we have had many clients go beyond just compliance ... and have crossed over into transparency.” notes Bradley Smith, director of marketing and communications for Shareholder.com. According to Smith, whose firm manages investor relations Web sites for over 1,000 public companies, that transparency includes going above-and-beyond mandates, like providing extensive board contact information on companies' investor relations Web sites. “We are seeing more and more clients being proactive and 'marketing' their board's accessibility and transparency to shareholders,” adds Smith.

For example, many companies—like Intel, Wachovia and Pepsico—highlight director communications policies near the front of their proxies, or include a table of contents that features communications with directors.

That's a big change from last year, when most companies buried the director communications policies at back of the proxy under headings such as “Other Matters” or “Other Information.” That was the case with Scana in both 2004 and 2005.

“The better place to put it is with the discussion of the board,” says Sullivan & Worcester's Berkenblit, adding, “Companies seem receptive on placement and want to keep up with best practices.”

Increased use of email is also apparent in the 2005 proxies. Pfizer, for example, maintained similar director communications policies from 2004 to 2005; however, this year the company added a bulleted list of various email addresses to which shareholders could send their concerns. Those email addresses included those of the audit, compensation, and corporate governance chairs.

Berkenblit acknowledges that, was is the case at Pfizer, he's seen more use of email boxes than last year. One benefit of such a policy is a real-time response from the company; correspondents receive an email confirmation that their message has been received.

Experts note that companies will continue to modify their policies over the coming years. For example, some companies have begun tying their director communications processes to other Sarbanes-Oxley requirements, thereby keeping related contact information together. "Some have combined whistleblowing procedures with their director communications procedures," says Berkenblit. That trend is likely to continue as best practices emerge and companies become more knowledgeable about the types of issues being communicated by shareholders on a regular basis.

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