Shareholder e-Forums: Useful Tool or Pitfall?

You probably overlooked this, but the Securities and Exchange Commission is trying something new with its latest amendments to federal proxy rules: encouraging public companies to establish online shareholder forums.

The rule amendments were approved on Nov. 28, 2007, but were quickly overshadowed by the Commission’s vote on the same day to let companies block shareholder access to the proxy. The SEC issued its final rule on proxy access Dec. 6, but as of last week, the Commission still had not published its final rule for shareholder e-forums. The devil may be in the details, but we do know in general terms what the SEC’s intentions for shareholder e-forums were—and given the ever-rising pitch of shareholder activism, those intentions are worth studying.

In his remarks at the Commission’s Nov. 28 meeting, Chairman Christopher Cox said: “Today’s action is intended to tap the potential of technology to help shareholders communicate with one another and express their concerns to companies in ways that could be more effective and less expensive.” The rule amendments, he said, were intended to remove legal concerns, such as the risk that discussion in an online forum might be viewed as a proxy solicitation that might deter shareholders and companies from using this new technology.

The latter was a concern that corporate commentators expressed when the rules were proposed. Whether this new exception (and the amendment that exempts a company or anyone else who creates or operates an electronic shareholder forum from legal liability for statements made by others) is sufficient enough to encourage companies to establish an e-forum remains to be seen. Company

officials participating in an e-forum must take caution to avoid violating Regulation Fair Disclosure.

Now, some electronic shareholder forums, such as the Motley Fool and Yahoo, already exist. Shareholders today use these forums to communicate with one another all the time. What is missing, however, is company input into this process. In previous columns related to the proxy process, I’ve encouraged companies to use their Web sites and other means to communicate directly with their shareholders regarding the company’s position on proxy issues, particularly those that are contested. But these means are largely a one-way street. The “e-forums” would provide a two-way street for communication between the company and its shareholders, and among shareholders themselves. And the activist pension funds were among the strongest supporters for company-sponsored e-forums.

I did some preliminary checks with investor relations officers, corporate secretaries, and governance professionals, and most were not aware of the new rule. Those who were said they planned to monitor the other forums just as they do with the blogs, but none said their company planned to initiate its own shareholder e-forum. I sense there is a concern that activist shareholders could use a company-sponsored forum to organize a campaign to gain majority support on issues such as executive compensation, majority voting for directors, “withhold” votes for specific directors, and other hot proxy issues. Even on non-binding issues, in today’s environment, ignoring a majority vote can be difficult.

I suspect that some companies might be willing to communicate the company position on specific proxy issues through their Web sites or direct communications with shareholders. The sort of open-ended debate possible through an electronic forum, however, is another matter altogether. Commissioner Paul Atkins noted that the SEC defines the term “solicitation” quite broadly, and “…as a result, [we] extend the proxy rules to any person who seeks to influence the voting of proxies, regardless of whether the person is seeking authorization to act as a proxy.” Consequently, Atkins expects the staff to monitor the development and use of shareholder e-forums for any “potentially abusive practices.”

So, could such a forum become a devil’s playground? One should read or re-read the Compliance Week interview in the July 17, 2007, issue with shareholder activist Eric Jackson, chief executive of Jackson Leadership Systems. As an individual investor, Jackson used his blog and videos posted on YouTube to band together some 100 shareholders with a combined $60 million stake in Yahoo. They led a campaign that resulted in a 33 percent “against” vote for seven of the 10 Yahoo directors at the company’s June 19 annual meeting. CEO Terry Semel quickly became Yahoo’s former CEO.

Just like what we are observing in the presidential election process, electronic forums are now playing a key role in engaging activist participants in Corporate America. It’s time to recognize the power of the Internet and learn to engage it and manage it the best we can.

So, what should companies consider with respect to shareholder e-forums? A few points:

Clearly, one should monitor the existing e-forums to know which shareholders are active, what they are saying, and what they are advocating.

This information should be provided in reports to senior management and the board, summarizing what is being said on key issues, who the key players are, and whether the company should respond.

Under the theory of “keep your friends close and your enemies closer,” you may want to consider creating a shareholder e-forum to have a better handle on what’s going on among your activist shareholders.

The 2008 proxy season is likely to be even more active and contentious than last year, particularly those shareholder proposals focusing on executive pay and “vote no” campaigns for certain directors. (And the focus on director elections is partly inspired by the SEC’s decision to exclude proxy access proposals.)

Companies might even derive some benefit by demonstrating that they take the initiative and want to hear investors’ ideas and engage in a discussion of what is best for the long-term future of the company and its shareholders.

The e-forum can also be a way to expose those who are acting in their own short-term interests and anticipated profits, as opposed to acting in what should be the long-term interests of shareholders and the future viability of the company.

While the dominant users of a company sponsored shareholder e-forum might likely be the activist institutional investors, it would also give individual investors a way to better understand the company’s position on proxy issues and the ability to use the forum to express their views.

On balance, it seems prudent for companies to consider the pros and cons of establishing their own shareholder e-forums and be leaders—not just reactionaries—in the shareholder democracy movement by showing their willingness to engage in an open discussion of what’s in the best long-term interest of the corporation and its shareholders.