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The Securities and Exchange Commission’s proposal to do away with the required mass mailing of printed proxy materials – including annual reports – to investors has created a buzz of conversation. Does the proposed SEC ruling promise to take one small step for the shareholder or one giant leap for corporate interests? What truly constitutes “better” shareholder communications? Response letters and e-mails sent to SEC Secretaries Jonathan Katz and Nancy Morris reveal a wide range of concerns that are anything but mild.

Ever since the SEC issued its controversial S7-10-05 ruling in December of 2005, the investor relations industry has been engaged in a lively discussion concerning, among other things, shareholder rights, shareholder value, the rise of taxes and the collapse of industries.

What the Proposal Says
Specifically, the proposed ruling calls for an amendment to the Securities Exchange Act of 1934, providing for “an alternative method for issuers and other persons to furnish proxy materials to shareholders by posting them on an Internet Web site and providing shareholders with notice of the availability of the proxy materials.” This means that public companies who in the past have been required to print and mail proxy materials to their shareholders – which include annual reports or 10-Ks, proxy voting cards and proxy statements – would have the option of posting these communications on the Internet and providing shareholders notice of and instruction on where to locate this information online.

The SEC, which refers to its proposed new method as a “notice and access model,” would require the issuer (such as the publicly traded company) to send a notice to shareholders at least 30 days before an annual shareholders’ meeting that proxy materials are available on the Internet. What’s more, the new ruling, if adopted, would still require that companies make copies of their shareholder communications available to shareholders in print upon request at no charge.

What Do People Think?
In its summary statement, the SEC asserts that public companies would be able “to lower the cost of proxy solicitations that ultimately are borne by shareholders.” In other words, the SEC believes its proposal will aid corporate profitability and increase shareholder value.

However, since the proposed ruling was first introduced, the SEC has been receiving comments from a wide range of interested parties on the idea – a testament to the complexity of the addressing the question what is, exactly, in the best interest of shareholders? Can cost-cutting measures such as paperless communications provide benefits without compromising a shareholder’s right to investment information that is easily and universally accessible? What about the ramifications to other interested parties, such as financial printing companies, investor communications professionals, mailing houses and other service providers?

After reviewing a number of comments on this issue posted online at www.sec.gov, we find that arguments for and against the proposed ruling seem to be aligned around some common concerns.

Cost Savings: What Are They? Are There Any Downsides?
The SEC’s proposed cost-cutting measure would seem to be welcomed by both corporations and their shareholders. In its proposal, the SEC indicates it examined the current number of non-voting beneficial shareholders and the amount of proxy materials mailed by issuers. It estimated that, by adopting a notice and access model, a minimum of approximately $1 billion in printing and postage could be saved.

The management group at United Financial Corporation, a bank holding company with net income of $4.1 million, applauds the proposed ruling in an e-mail to the SEC, saying “It is a welcome easing of business costs associated with hard copy delivery at a time when public companies are faced with ever increasing costs for compliance with Sarbanes-Oxley regulation.” Daniel Warmenhoven, CEO of Network Appliance, a world leader in unified data storage solutions with revenues of $1.6 billion, also welcomes the cost savings. He writes to Secretary Jonathan Katz, “We believe the annual cost savings resulting from the proposed rule changes will be in excess of $350,000, or more than 80% of today’s costs.”

However, while the SEC’s proposed $1 billion savings is undeniably a lot of dough, some believe that number is misleading. For example, Automated Data Processing (ADP), a worldwide provider of investor communications services to the financial services industry with total business revenues of $8 billion, thinks that saving $1 billion represents a mere drop in the proverbial bucket of proxy solicitation costs. In a letter to Secretary Nancy Morris, ADP Broker Services Group Co-President Richard J. Daly wrote “Analysis of the printing postage costs of recent contested proxy solicitations indicates that the proposed rules would have had less than a 2% impact on total solicitation costs.” ADP determined that 95% of solicitation costs were unrelated to printing and postage and were, instead, affiliated with discretionary services such as proxy advisors/solicitors, processing fees, legal fees, public relations and advertising.

Dr. James J. Angel, associate professor of finance at the McDonough School of Business at Georgetown University, has another point of view regarding cost savings. While he doesn’t contest the SEC’s projected $1 billion cost savings, he does assert that these savings would actually be offset by other new costs. Angel writes that by eliminating required mailings, the SEC may inadvertently be “mak[ing] it easier for shareholders to overlook important communications,” leading what Angel fears will be a lower rate of shareholder voting. As a result, Angel contends, firms may have to spend more money on proxy solicitations to get quorums or postpone shareholder meetings, “offsetting the savings from less direct mail.”

Like Angel, the Business Roundtable, an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees and $4 trillion in revenues, also likes the idea of saving money, but cautions in a letter to Secretary Nancy Morris, “In moving forward with this proposal, the Commission should see that the potential cost savings inherent in the proposal are in fact achieved.” The Business Roundtable cites mailing, database management and other communications-related costs as having the potential to chip away at any savings.

However, unlike Angel, individual investor Robert C. Atkinson feels the proposed ruling will both save costs and encourage voting. In his e-mail to the SEC, he writes, “The proposed change to the mailing of proxy materials will save public companies the [sic] substantial dollars spent in printing and mailing proxy materials to the vast majority of investors who rarely open and read them and, unfortunately, take the time to vote their shares.” He adds, “The availability of annual or special meeting materials on the Web may actually spur shareholder voting since most companies have links on their websites to the tabulators, making it a convenient one-stop shop for viewing and voting a proxy.”

Finally, individual investor Robert E. Johnson has yet a different take on the whole cost savings issue: he doesn’t believe that shareholders stand to benefit at all and, in fact, thinks that society will be burdened by such a ruling. “I realize that corporations will save approximately a billion dollars collectively in printing and mailing costs if your proposal passes,” Johnson writes, “but who is naive enough to think those dollars will be used to increase shareholder value?”

He continues, “You may be saving public companies a billion dollars, but you’ll probably pay out the same amount in unemployment benefits to all the people that will be out of work as a result of this proposal. Once again the taxpayer will have to pay the bill while lightly taxed public companies will reap even larger profits. Please rethink your position because what you are doing will be wildly inefficient and will put many hard working taxpayers on the ‘day old bread’ line.”

Focus on Technology: Is It Better Communications for Individual Investors?
The SEC’s proposal states that there is enough evidence to support that electronic transmittal of shareholder information is both accessible and a growing preference among investors. To support their notice and access recommendation, they cited the following statistics from ADP and Nielsen/NetRatings:

  • More than 10.7 million beneficial shareholders already have given their consent to electronic delivery of proxy materials and approximately 85% of their shares were voted electronically or telephonically during the 2005 proxy season.
  • Up to 75% of Americans have access to the Internet in their homes, and this percentage is increasing steadily among all age groups.

Like the SEC, several individual investors think the time has come for Internet-based proxy materials. Jack Thomas writes, “All proxy material should be available for viewing on the Internet ... this is only a natural progression of technology.” Jeremy J. Janowski, a captain in the United States Air Force agrees. “As a person who grew up in the computer age, I can highly respect the idea of this regulation proposal,” he writes. “I think it’s a fantastic idea and am quite surprised that it has taken this long to make such a proposal.” Similarly, Timothy Rush writes, “Cost effective electronic communications is a revolution that has arrived. Let us as Americans lead the way.”

Not all individual investors, however, are enamored with the Internet or making online communications the primary means of disseminating shareholder communications. Some, in fact, are downright outraged. The cons for this proposed ruling received by the SEC from individual investors currently far outnumber the pros.

“Is it true you are contemplating changing rules to allow companies to make their proxy statements available only over the Internet, without asking stockholders their preference? What are you thinking?” e-mails Stanley J. Wolski, a member of Telecom Pioneers, the largest industry-related volunteer organization in the world comprised of 620,000 current and retired telecommunications employees. He writes, “Many stockholders, especially retirees, have no Internet access. How will they acquire the information they need to make a proper decision? I am stunned by this disregard for fairness.”

Retired individual investor James A. Reed makes a similar point in his e-mail to the SEC. “I think that restricting proxy voting to the Internet only closes out many individuals that do not have access to the Internet,” he writes. “There are a significant number of WWII vets and others that do not wish to expend the capital to buy computers and the other hardware required.”

Another individual investor, Todd Collier, addresses the SEC’s statistics that 75% of the American population have Internet access. “What about the other 25%, who would have to struggle to find Internet access to view the material?” he says. “By allowing this, we would essentially be preventing 25% of the population from investing in firms because they will not have access to the same amounts of information as investors with Internet access.”

Collier continues, “This worries me because individuals like my grandparents have investments in various companies and no Internet access.”

More e-mail expressing individual investor concerns about the Internet:

  • James Phipps, referring to the current SEC ruling that gives shareholders the ability to “opt out” of receiving printed proxy materials: “In my opinion, giving shareholders the option to receive proxy or investment material via the Internet or Web pages is good enough. Doing the reverse and requiring them to ask for copies would not be in the best interest of the shareholder.”
  • Dr. Ashley W. Burrows, an accounting professor: “This proposal would seem to go against the underlying objective of the Sarbanes-Oxley Act, namely to provide investors with reliable financial information for decision-making. Many investors do not have access to the Internet. Such a proposal, if implemented, could threaten the ‘market in information’ so essential for investment decision-making. Investment elitism would be given an impetus.”
  • And, finally, Joel H. Brown, a member of the AmeriTech/SBC Retirees Association: “I am 70 years old and have been in the computer business since 1964. However, my brothers and sisters who are within 10 years plus or minus of my age and my parents, who are 94 and 101, never use a computer regardless of my preaching. So, to have companies deliver proxy material only by Internet would be a big problem for my five brothers and sister plus my parents. It is way too soon to start doing Internet only delivery.”

Paper versus Pixels
The SEC’s proposed ruling also seems to have touched off an interesting observation about human behavior: despite the widespread use of computers and technology, some people simply prefer paper to pixels.

Individual investor Tony Paine writes, “I know that electronic reports are available from company websites. I use those resources from time to time (usually for research), but for my owned investments, I like hardcopy because I can make notes in it and keep it at hand during the year (or for several years).” He adds, “It would be prohibitively expensive to print my own hardcopy and it would take 2-3 times the physical space to store it because it would be printed on one side of the paper.”

Mark T. Sullivan emails, “Hard copy allows for the investor to review and study the materials anywhere they [sic] may be. As busy as Americans are, I don’t see any value in the SEC finding another way to tie us to our computer.”

William K. Sjostrom, Jr., an assistant professor at the Salmon P. Chase College of Laws, Northern Kentucky University, writes, “A computer screen is a poor substitute for a paper copy, and some shareholders will not have computers, or will not have Web access, or will not have printers, or will not want to absorb the cost of printing the materials themselves.”

Dan Badinghaus comments, “Though I am employed as an Account Manager for a Cincinnati, Ohio independent wholesale paper distributor, my reasons for opposing paperless proxies go beyond my employment status. I don’t like, I don’t trust, I abhor important communications such as proxies being sent via e-mail. My home computer is not trustworthy, often locking up due to spam and various other issues – making receipt of e-mail troublesome.”

And, investor James Powell e-mails, “The day I stop getting my paper proxy statements in the mail is the day I stop investing. It’s just downright un-American.

An Industry Threatened?
The shareholders communications industry is very big business in the U.S., and a change such as the one proposed by the SEC no doubt stirs concerns of lost revenue and livelihoods.

In a letter to Secretary Katz, the Printing Industries of America/Graphic Arts Technical Foundation (PIA/GATF) asserts that its industry and the businesses of its vendors could be negatively impacted. In a letter to the SEC, PIA/GATF points out the size and scope of its organization, which includes “more than 12,000 printing and graphics arts member companies.” Furthermore, PIA/GATF indicates that printing annual reports and proxy materials “accounts for a large volume of work produced by our industry, which employs more than 1.2 million workers nationwide.”

Similarly, Domtar, the third largest producer of uncoated freesheet paper in North America, estimates that the SEC’s proposed ruling could add to the challenges already facing North American manufacturing industries. Domtar President and CEO Raymond Royer notes that “in November of 2005, Domtar announced the elimination of 1,800 jobs, or 18% of our workforce.” Like PIA, Royer believes the ruling would have a negative ripple effect. He writes, “Domtar is concerned about the negative impacts this proposal could have on our industry, as well as the industry’s supply chain business, including printers, merchants and converters.”

Interestingly, correspondence from both PIA/GATF and Domtar cite the same statistics to point out that the SEC’s data on Internet usage does not take into account senior citizens who, according to PIA/GATF “fall into the ‘digital divide’.” PIA/GATF notes “Studies show that only 22 percent of Americans 65 years and older use the Internet; therefore more than 75 percent of elderly shareholders may not participate in the proxy voting process and would not receive their reports.” Both PIA/GATF and Domtar note “some consumer research indicates that nearly 45 percent of Americans rely on the confidence, privacy and safety of receiving information on paper.”

Fraudulent Voting System: A Bigger Fish to Fry?
Lastly, while some persons were fine with the SEC’s proposed ruling, they felt that there was a more important, underlying issue – a fraudulent voting system that works against small investors.

Individual investor Judy Cline summed up the problem as follows, “Before you let the Internet handle the issuance of materials, tell us how you intend to protect the rights of shareholders where counterfeit shares exist.” Cline asserts, “Shares are being loaned out into the market to cover short sale executions and the institutions and preferred clients are receiving a kickback for the lending via an interest payment. The mom and pop investor will not see any revenue when their shares are being lent out, but those holding the majority of shares – institutions, hedge funds, wealthy clients – will. It is the same entities that control much of the proxy voting power.”

Lest Cline appear to stand alone on this issue, individual investor John O’Brien also writes, “If the industry told investors the truth – that they paid their money but didn’t receive their shares or, alternately, that they don’t own their shares (as their broker lent them out to a short seller) – then there would be widespread investor outrage. That is why the elaborate obfuscation mechanism is necessary, to create a facsimile of legitimacy and fool investors into believing that they are receiving the right to vote, when they don’t have that right.”

O’Brien adds, “One share, one vote. Simple. The current system makes a mockery of that fundamental right. I would suggest that the Commission fix that before debating the merits of paper versus pixels.”

What’s the Net?
As of our press (or, should we say, pixel?) date, the SEC had not yet made a decision on S7-10-05. While the current commentary offers strong opinions both in favor of and against the ruling, there are also advocates for modifications to the proposed ruling. Suggestions include:

  • Phasing in the notice and access model,
  • Ensuring that proxy cards and other materials are made available simultaneously,
  • Including self-addressed, stamped envelopes with the Internet availability notices to enable investors who do want paper copies to respond easily, and
  • Furnishing all relevant information pertaining to the proxy vote in the notice to shareholders.

Opinions on matters such as fairness and what defines “better communications” are clearly subjective ones. Yet, it’s undeniable that this ruling has struck a nerve among investors, public companies, issuers of proxy materials, printing and paper industry representatives, retirees and many, many more constituents. And, in a country that advocates liberty and justice for all, the SEC has a vital role to play in making sure that the voice of the majority and minority are equally considered in its final decision.

Terry Davis, president and founder of see see eye, is an international award-winning communications professional who has developed and executed numerous communication programs for Fortune 500 firms and other companies. see see eye clients have included BellSouth Corporation, Delta Air Lines, Goodrich Corporation, IBM, Neenah Paper, Ryder System, The Coca-Cola Company, UPS and other companies. Terry has spoken frequently on the subject of annual reports and communications to various organizations, including the Public Relations Society of America, the National Investor Relations Institute, the American Institute of Graphic Arts/Atlanta and Georgia State University.

see see eye is an award-winning graphic design firm that helps Fortune 1000 companies and other organizations build stakeholder confidence. The firm uses strategic creative design and effective message development to produce identity and branded collateral programs, Web sites and annual reports targeted to investors, customers, employees and community members.

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