Corporations saw significant change in 2009 in how they communicate with shareholders, thanks to a confluence of emerging trends: changes in how the markets work, regulations affecting corporate disclosure and the proxy process, and an upsurge in investor activism. Companies need to take stock of what’s happened and reconsider their communications strategies going in 2010 and beyond.
2009 began with a prediction that the Securities and Exchange Commission’s roadmap for adopting International Financial Reporting Standards would not advance under the Obama Administration and a Democratically controlled Congress, contrary to what the previous SEC had envisioned.
This conclusion came from a financial regulatory roundtable that I participated in along with some of the top Washington lobbyists from the financial sector. There was a general consensus that IFRS might face resistance because it is a principles-based accounting system, rather than the rules-based U.S. Generally Accepted Accounting Principles. IFRS is contained in 2,500 pages, GAAP in some 25,000; that alone gives rise to the notion that IFRS represents a form of deregulation at a time when Democrats in Congress are calling for more regulation to deal with market failures stemming from the 2008 financial crisis.
The timeline has remained unclear since then. SEC Chief Accountant James Kroeker, addressing a financial reporting conference in November, gave assurances that if (not when) the SEC decides to move ahead on IFRS adoption, issuers will have “ample time to prepare.” Speaking at the same conference, Robert Herz, chairman of the Financial Accounting Standards Board, expressed his frustration saying: “The $64,000 question is, ‘Where are we going in the U.S. toward IFRS?’”
Also early in 2009, blogs were entering the world of investor communications more than ever before. Dell Inc. became one of the first to adopt a blog for communicating company information to shareholders and getting their responses. By the end of the year, the investor-relations world was in a-twitter, so to speak, over adding a repertoire of social media to the means of communicating company messages. Most companies remained somewhat wary of their use, given the potential of violating Regulation Fair Disclosure—a rule that does not cover marketing professionals who aggressively use Twitter, Facebook, and other social media in their communications strategy.
2009 also saw a continuing decline of sell-side research, largely due to an increased number of buy-side firms that no longer pay money for research reports. To compensate for this loss, sell-side analysts used a business model where they arrange company meetings with institutional clients in return for soft-dollar compensation from the buy-side. For IROs, this is a low-cost way of providing institutional investors direct access to senior management. The downside, however, is that these meetings are usually arranged with shorter-term investors, since analysts need turnover to make their business model work.
On the buy-side, we saw an emerging trend where portfolio managers moved away from traditional analysis of specific companies to asset management by trading in indexed Exchange-Traded Funds. Portfolio managers realized that their concentration on traditional research often resulted in performance that was less than that of many indexed funds. Consequently, we witnessed a surge in ETF trading that reached around 40 percent of daily trading volume on the major exchanges. This trend also resulted in a shrinking audience for “the company story” since the quantitative types who create ETFs use complex computer models and have no need to talk with company management for input to their models.
On the disclosure front, the SEC issued guidance on using company Websites for disclosing periodic reports and other material releases. One might have anticipated that companies would rush to adopt this practice, to save the cost of using wire services to disseminate their releases—but there was a hitch. The SEC placed the burden on the company to demonstrate that its Website would reach a sufficiently large audience of investors. Given this, legal counsel often advised against relying solely on the company’s Website for disclosure. Moreover, most companies continued to use the wire services believing this would give them greater exposure to analysts and investors in a difficult market environment where maximum exposure to corporate information was critical to a company’s success.
The SEC also issued new guidance on Regulation Fair Disclosure—long overdue, given that the rule went into effect in October 2000. In the August 2009 guidance release, the SEC made no changes to the rule itself. But the agency did clarify several points via guidance in the Compliance and Disclosure Interpretations of the SEC Website, using a series of questions and answers that illuminate SEC thinking on a variety of disclosure issues. The bottom line is that the more information a company discloses in the public marketplace, the greater latitude investor-relations officers and other senior managers have in discussing these matters with limited audiences or in one-on-one meetings with analysts and investors without violating selective disclosure rules.
I suspect we may see increased use of blogs and Twitter—the latter as a means for providing investors a link to the source for new material developments.
Complicating the disclosure front is the increased use of social media in investor communications. While those involved in marketing communications have taken a deep dive using blogs, Facebook, and Twitter, IROs have been more cautious. They worry about the potential for selective disclosure using these means, and institutional investors generally prefer the more traditional means of getting information anyway. Stay tuned, however. I suspect we may see increased use of blogs and Twitter—the latter as a means for providing investors a link to the source for new material developments.
Conversely, we are learning that some activist investors intend to use the social media to engage individual investors in voting on specific proxy issues once a new rule goes into effect in January ending broker-dealer voting in director elections. This change eliminates the ability for brokers to vote on behalf of retail clients when those clients have not given voting instructions. In the past, these votes typically were cast with management and on average accounted for about 20 percent of the total vote. Without them, small and mid-sized companies may face challenges in achieving a quorum for the annual meeting. And companies that have adopted majority-voting thresholds face the potential of directors failing to get elected, should activists mount a withhold campaign against them.
A related annual meeting issue was the introduction of the SEC’s notice-and-access provisions allowing companies three alternatives in providing proxy materials to investors: (1) give “notice” to investors that the proxy materials could be accessed on the company’s Website (although people who want hard copies mailed to them would have that option); (2) use a combination of notice-and-access and hard copy mailing to all investors; or (3) mail hard copies only.
A November 2009 National Investor Relations Institute survey showed that most companies using notice-and-access only reduced their print runs, but overall saving on printing was offset with an increase in service provider costs. Equally alarming, notice-and-access corresponded to a significant decline in retail investors voting on proxy issues. A Broadridge Financial Solutions study for the proxy year ending June 30, 2009, found that those who used notice-and-access had a mere 4 percent of retail investors voting their shares! The total retail investor voting using notice-and-access and mailing proxy materials dropped significantly to only 13 percent. Consequently, the SEC has issued for comment some revisions to notice-and-access aimed at giving companies greater latitude in how and what they should communicate to investors about the importance of voting the proxy.
Trends to Watch in 2010
(1) Greater investor focus on executive compensation, with the strong likelihood that Congress will pass say-on-pay legislation requiring companies to give shareholders an opportunity to cast a non-binding vote on executive compensation.
(2) Increased institutional investor interest in corporate social responsibility and sustainability activities. A 2009 NIRI survey found only a few companies provided funds to support adoption of CSR or sustainability, and few IROs were involved in policy-making in this regard.
(3) IROs who have left corporate governance issues to the corporate secretary and general counsel will find it important to take a more active role by adding governance to the IR portfolio.
(4) A strong likelihood that the SEC will pass some form of proxy access for director elections.
(5) Companies will step up efforts to engage institutional investors in one-on-one meetings, given the shrinking audience for the company’s investor messages.
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