May 7, 2014

Disclosure Reform: What Do Investors Want?

In my first blog on disclosure reform, I identified three issues that I think should frame the SEC’s project – pretending that the existing disclosure regime doesn’t exist. As I head to CII’s Spring Conference today, let’s tackle the first issue – what is it that investors want? Below you will read (and listen) about an institutional investor survey indicating that most investors skip to specific sections of proxies. And that 6% of investors don’t read them at all. Of course, that number gets much higher if retail investors were included in that survey. And in talking to institutional investors, it might be a lower level staffer who is tasked with reading the proxies as some of the folks on an investor’s proxy committee – all of whom can influence the vote for that investor – that don’t read the proxies at all. Instead, they rely on a short summary from that lower level staffer.

This shows that most investors don’t do a straight read. That makes sense based on my own personal reading habits of SEC filings. But I would posit that different investors value different types of disclosures. That means that “less is not more” as I believe that most investors don’t care about the ultimate length of a disclosure document as they navigate to the sections they want and aren’t concerned with reading the entire thing. This reflects the sentiments expressed by Corp Fin Director Keith Higgins in his recent speech on disclosure reform (ie. reducing volume of disclosure is not the sole end game, particularly given that many investors have expressed an appetite for more information, not less).

So the mission of the SEC’s project shouldn’t be about reducing document size. However, I do imagine that investors want a better reading experience for those sections that they do read – in other words, better usability. That’s one of the reasons I have been highlighting fine examples of usable disclosure in my spate of recent videos about ’14 proxy statements. It might be time for a “Plain English 2.0” campaign by the SEC.

But let’s back up. How important are SEC filings compared to other ways that a company communicates? Earnings calls, investor conferences, interviews with senior executives in the press, other postings on the IR web page and via social media. It’s fair to say that investors care more about those other ways (and of course, neutral third-party analysis is even more valuable – but that doesn’t mean that corporate disclosure isn’t important. Investors and those neutral third parties need info directly from the source too). This touches on the second issue about how disclosure is made available – but I think it’s important to consider why investors might care about communications outside of SEC filings more.

It’s because more forward-looking information might be gleaned in those types of communications. It’s also likely that content is more “straight talk” in nature since its not as “lawyered” as a SEC filing. I believe that if more disclosure made in SEC filings was crafted in the vein of Warren Buffett’s letter to shareholders, it would be consumed by investors more. I know that we all can’t be Warren – but that doesn’t mean we shouldn’t try or be trained to write so.

Anyways, more surveys will be conducted about what investors want to see in disclosure – and the results will be meaningful to guiding disclosure reform. But I also think that big data should play a role here. I don’t want to place too much reliance on the short-term – but studies already show what type of corporate information is most likely to cause the market to move. Some investors might state that they want certain types of information, but their behavior illustrates that they really care about other types.

Finally, consider the medium. I think video will continue to take off as a way to reach investors. Consider this excerpt from this interview with communications expert Nina Eisenman:

So we had the opportunity to interview some buy-side and sell-side analysts about this topic, and most analysts will go directly to the 10-K. The interesting thing that we found in our interviews is that if there is video content, and the video content is not just a reiteration of the content they just read (so it can be something like a virtual investor day by showing new facilities or a new product line) investors are very interested in seeing that type of content. It adds another layer that they couldn’t get from the print.

Investor Survey: Proxy Disclosure Preferences

At our proxy disclosure conference last year, one panel still rings in my mind about how one institutional investor said she might have a staffer spend 20 minutes on a single proxy statement – but then that company might garner a maximum of 5 minutes worth of discussion during the proxy committee meeting when the actual decision is being made to cast votes for the company’s annual meeting. For me, this speaks volumes about how important it is to strategize when deciding on your approach to conveying your story to investors.

Here’s news from Davis Polk’s Ning Chiu:

Even with the intense focus on improving proxy disclosure, a recent survey of investors from RR Donnelley indicates that few read all the details. 60% responded that they skip directly to specific sections, usually the CD&A executive summary. That, along with the proxy statement summary if one is available, and the CD&A, are considered the key sections. 12% reported they don’t read proxies at all, and only 6% review the entire document.

Disclosure that received high marks includes director nominee information, director independence, corporate governance profiles and company opposition statements to shareholder proposals. While investors also generally liked the discussion of compensation philosophy, they were lukewarm about the clarity of specific compensation disclosure surrounding pay-for-performance alignment and performance measures, which is unfortunate given investors’ sentiments that these areas are two of the most important considerations affecting voting decisions. Director-related disclosure that received poor marks includes succession planning and board evaluations. We note that neither discussion is required by regulation, but has become more common due to investor interest.

While providing graphic presentations for executive compensation is a trend that is clearly favored by investors, respondents complained about graphs that were “over-engineered”, complex and poorly-labeled or simply difficult to follow. Companies should be aware that some investors believe they were being deliberately misled in certain cases.

In terms of presentation, an overwhelming number of investors reported that they view proxies through online platforms rather than reading hard copies. Their own voting policies and analysis, along with direct engagement with the company and a review of proxy statements, are the biggest influences in how they vote. Not surprisingly, investors wish proxies were shorter, preferably under 60 pages.

Podcast: Investor Views on Proxy Disclosure

In this podcast, Ron Schneider discusses RR Donnelley’s recent survey of institutional investors about what really matters to them in proxy statements (here’s a survey summary), including:

– Why did RR Donnelley conduct the survey?
– What was the survey’s methodology, target audience and who responded?
– What were the key results of or lessons learned from the survey?
– What were the most surprising responses to the survey?
– How can companies use the intelligence gleaned from the survey?

Recently, SEC Commissioner Aguilar delivered this speech on “Looking at Corporate Governance from the Investor’s Perspective”…

– Broc Romanek