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Here's what people are saying:
"HUGE cost savings…HUGE convenience of not being overloaded and overwhelmed with mostly unread annual reports…HUGE relief for our landfills where most ARs very quickly land, mostly unread."
Carl T. Hagberg, Chairman, Carl T. Hagberg and Associates
"Hard copies are the most consistent means of distributing information to all shareholders. In such a skeptical and heavily regulated system, it seems strange that the audience would be given the burden to go view the online version rather than the company having the responsibility to effectively and equally provide communications to a vast audience."
Coordinator Finance and Communications, Energy Company
"I don’t think it (the proposed change) is good or bad, merely a recognition that the public is increasingly turning to the Internet for information and giving companies a choice of how to disseminate. Regardless of the rule, there is still a place for the print annual report. Print and online serve distinct communication purposes, so they ought to be able to co-exist."
Marc Rice, Account Executive–Investor Relations, Southern Company
"Reading this type of material online is flat out impracticable," I work in the securities industry, and it is still very hard…to use. Even for my personal investing, I never opt into electronic delivery of this material."
Charles Langenhagen, CFA
"The proposed rule…would be a huge step backward in corporate governance. It would encourage even less participation by stock-owners in monitoring and improving their corporations’ performances."
Carl Olson, Chairman, Fund for Stockowners Rights
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Savage Design Group conducted a survey of Investor Relations Officers in early 2006. The 62 respondents represent companies with annual revenues ranging from less than $300 million to more than $100 billion across a broad spectrum of industries. Nearly half of the companies represented have annual revenues of $1–$8 billion. Slightly more than half have a shareholder base that is 75+ percent institutional, and nearly three-quarters are 50+ percent institutionally held. Respondents range from investor relations professionals to company presidents and CEOs. The vast majority are in management or executive positions, with half having officer titles.
The survey revealed strong support for the SEC’s proposals on Internet availability of proxy materials. Nearly three-quarters of the 62 respondents called the proposed rule changes an "excellent" or "good" idea, and more than 80 percent plan to change their investor communication practices if the "notice and access" model is adopted. An overwhelming majority cited cost/time savings and the elimination of waste as the primary benefits.
Some respondents also said that "notice and access" will make for more timely and accurate communications with investors. "Annual reports are stale, marketing oriented and potentially misleading in that they do not convey the full investment thesis as compared to the SEC 10-Qs and 10-K," said Zan May, manager, investor relations, of CenterPoint Energy.
Despite their show of support, some of the IROs acknowledged that there are downsides to the proposed changes, primarily placing the onus on investors to locate or request and read important information on their holdings. "It (notice and access) will not ‘force’ our annual report in front of investors. They will have to have Internet access, which isn’t always the case in the aging population," one respondent noted. Another observed, "There is really no replacement for having a hard copy book in hand to read."
In addition to the possible downsides for investors, a few of the IROs saw potential drawbacks for companies, such as reduced voting by certain investors.
"Many companies may find themselves in all kinds of trouble because they have not had a good chance to adequately and con-vincingly ‘tell their story’ to the ‘patient investors,’" Hagberg observed. "Some will see the number of votes cast fall off even more – from the ‘naturally friendly’ investors while the ‘naturally unfriendly and/or skeptical voters’ will continue to vote almost 100 percent of the time."
Are Annual Reports an Endangered Species?
Eighty-seven percent of the companies represented in the survey currently produce some form of printed annual report (full AR, summary AR or 10-K wrap) in addition to the 10-K. Nearly half reported having changed the format in the last five years, in most cases to scale back the size and cost of the report. The most common move was from a full annual report (currently used by 36 percent of respondents) to a 10-K wrap (46 percent). Many of the companies surveyed offer online versions, either a PDF file of the report as it appears in hard copy (42 percent) or an online annual report designed specifically for the Internet (16 percent).
Although 81 percent of the IROs surveyed said they would change their practices in some way if the "notice and access" model is adopted, they vowed to maintain effective communications by increasing electronic communications and enhancing their websites, producing new types of printed materials or continuing to print an annual report – just in smaller quantities.
"It is a key communication document, not just a filing requirement," observed Doug Pike, vice president, investor relations at Lyondell." Another respondent wrote, "Not everyone has email access, so we would still need to prepare an annual, and I think we would want to. It is our major means of communicating our story, strategies and financials to the investing community." Twelve percent of the respondents said they would never discontinue their printed annual report.
Many others plan to continue producing annual reports, but would opt for electronic methods of distribution. "We wouldn’t eliminate the annual report, we just wouldn’t send it in the mail to shareholders, unless they specifically requested it," said Jeffrey K. Smith, investor relations advisor at FedEx.
Some companies indicated that they would base their decision, in part, on what others do. Others cited the makeup of their shareholder base as a determining factor. "Over 40 percent of our shareholder base is retail," wrote Brook Wootton, director of investor relations and corporate communications for Weingarten Realty Investors. "The retiree group likes paper," she added.
One thing is clear from the survey responses. While the format or method of distribution may change, annual reports will be with us for the foreseeable future.
In contrast to the IRO survey, which offers a glimpse into the mind of corporate America, public comments posted on the SEC website present a broad range of opinions from a diverse cross-section of the investing public.
To be sure, ardent supporters of the amendments, primarily corporations and business groups, have weighed in, echoing many of the views and the cost benefits cited by the IROs. Some institutional investors also expressed their support, applauding the efficiencies as well as the potential for lower-cost proxy fights. But the proposal has equally vocal opponents, primarily individual investors, organizations representing their interests and businesses involved in the current proxy process. The most recurrent concerns they have voiced are:
- Can individual investors access materials online?
- Will they take the necessary steps to participate in the proxy process?
- Will the changes produce real cost savings and for whom?
Equal Access for Individual Investors?
In its publication of the proposed rules, the SEC cited data from a March 2004 Nielsen/NetRatings study, which found that 75 percent of Americans have access to the Internet in their homes, a percentage that is increasing steadily among all age groups. Many of the public comments questioned whether this is sufficient.
A bigger issue is the disproportionate impact on certain investor segments, particularly senior citizens. An October 2005 demographic survey sponsored by the Pew Internet and American Life Project, found that only 25 percent of Americans age 65 and over use the Internet at all, and half of those use it for little more than email.
Then there is the issue of access versus easy access. According to data from Forrester’s Q3 2005 Consumer Technographics survey, less than 40 percent of investor households have broadband at home, which many argued is a must for downloading lengthy materials. Aside from the technical challenges is the issue of investor preferences.
Over 10 million investors are now enrolled in e-delivery, a miniscule percentage relative to the number who have been offered the option, and 2.4 million who opted-in have subsequently opted-out, according to ADP. Among the reasons for returning to paper cited in the 600,000 comments that ADP has received from investors are:
- preference for the convenience of physical materials
- concerns about the security of financial information over the Internet
- difficulty of reading material on a computer screen
- concerns with technology and email generally
- shifting of printing costs from issuers to investors.
Ironically, even some large institutional investors who support the proposal have said they would continue to request paper proxy materials, citing convenience or record-keeping needs.
Hurdles to Proxy Voting?
One frequent criticism of the "notice and access" model is the number of steps required and the potential impact on participation in the proxy process by individual investors.
"The proposed rule would require that shareowners contact each company in which they own shares in order to receive paper materials," wrote Ann Yerger, executive director of the Council of Institutional Investors, which opposes an immediate shift to electronic disclosures and favors a slower, phased-in approach. "This approach causes delays in delivery…and creates complexity in the system."
A telephone survey of 1,500 investors conducted by Forrester Research in January 2006 indicates that these concerns are justified. Thirty-eight percent of respondents said they would be less likely to look at corporate disclosures and less likely to vote under the "notice and access" model, compared to just 16 percent who would be more likely to look at the disclosures and 12 percent who would be more likely to vote. Surveys by other groups, including AARP, produced similar results.
Who Will Pay the Piper?
Some opponents have even challenged the cost-saving claims, which are at the heart of the proposals. Some say corporate savings would be negated by uncertainty about the number of paper copies to print and the higher costs associated with processing individual requests for paper documents. Others worry that costs would simply be shifted from issuers to investors.
Olson pointed out that mass printing by corporations is far more efficient and less costly than printing from a home computer, which he estimated at five to 15 cents per page. ADP argued that total costs could actually increase under the "notice and access" model. In addition to the costs that would be shifted to investors and existing or new fixed costs to issuers, the unit cost for "pick n pack" fulfillment of requests for paper copies is six times that of mass fulfillment, according to ADP.
Whether "notice and access" is ultimately adopted is anyone’s guess. If the public comments are any indication, it’s a safe bet that we’re in for a long and lively debate on the merits of the proposal, a myriad of opinions on how it should be implemented and a new element of uncertainty for the 2006 proxy season.
Read on for tips that can help you maintain the support of your existing investors and generate interest among prospective investors regardless of the rules under which you are operating.
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