Poor communications between board members and shareholders could be a direct result of directors’ concerns over the rule Regulation Fair Disclosure, known as Reg FD, according to a developing policy report from Yale School of Management’s Millstein Center for Corporate Governance and Performance.
The report, Talking Governance: Board-Shareowner Communications on Executive Compensation, examines why “sustained two-way dialogue” between directors and shareholders is still rare in the United States. The silence could be due to directors’ concerns that reaching out to large shareholders could be considered selective disclosure, it concluded.
Adopted by the Securities and Exchange Commission in 2000, Reg FD restricts selective disclosure of material corporate information to analysts and large investors without providing it to the public at the same time. The SEC has launched only a few Reg FD probes so far, but the law has been widely considered to have changed the nature of investor relations.
Essentially, the report finds, the argument is that directors could risk disclosing matters of material interest to the market to a select group of shareholders rather than the market as a whole. But there is value in healthy communication, and advantages commonly resonate among those engaged in dialogue:
- Minimizing the use of shareholder resolutions as means of encouraging dialogue
- Humanizing the board, management and shareholders
- Gaining greater clarity with respect to the company’s long-term objectives
- Creating an understanding of the shareholder’s interests in the long-term objectives
- Garnering goodwill and trust from shareowners
“Regulation FD was created to prevent companies from selectively disclosing non-public, material information in a private setting. It does not appear to have been the intention of the commission to restrict private meetings with investors to review governance matters.” -Stephen Davis, Millstein Center for Corporate Governance and Performance, and editor of Global Proxy Watch.
Recently, Office Depot said that the SEC was exploring possible Reg FD violations at the big box retailer. That announcement came at the same time that CFO Patricia McKay announced her resignation.
Not every company considers Reg FD a deterrent to communicating with shareholders. Last year Pfizer announced that it would hold formal talks with large investors to discuss corporate governance matters. It said then that it would not be releasing anything that could be considered new material information during the talks.
The report states that companies motived to start conversationswith investors have commissioned in-house or outside counsel to providebespoke legal advice on the frameworks and constraints affecting suchinitiatives.
Moreover, if the SEC were to issue market-wide guidance affirming the circumstances under which a director-shareholder communication on governance issues occurs, costs could diminish. Currently, the report finds, companies have had to shoulder a cost burden to produce custom legal guidance.
Stephen Davis, program director at the Millstein Center and co-author of the report along with Stephen Alogna, a vising research fellow of the Center, writes that board members should not shun investors because of the fair disclosure rule: “Reg FD is a caution, not a barricade.” He added that directors and investors can continue to engage in “constructive communication” without running afoul of the rule by adequately education directors on what can or can’t be disclosed in meetings and by developing corporate charters to govern the talks.
“Regulation FD was created to prevent companies from selectively disclosing non-public, material information in a private setting,” writes David, also editorial director for Global Proxy Watch. “It does not appear to have been the intention of the commission to restrict private meetings with investors to review governance matters.”