A monthly newsletter from see see eye

Don't miss an issue! If our newsletter does not appear below, please go to our Web site where you can find the latest issue.

eye on > SEC's printed proxy proposal: "Dear Secretary" 

by Terry Davis, President, see see eye

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.

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 materials to their shareholders would have the option of posting these communications on the Internet and providing shareholders notice of and instruction on where to locate them online.

The SEC, which refers to its proposed new method as a “notice and access model,” would require the issuer to notify 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.

Review of a number of comments on this issue posted online at www.sec.gov indicated 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 adopting a notice and access model could save a minimum of approximately $1 billion in printing and postage.

While $1 billion is undeniably a lot of dough, some believe the figure is misleading. For example, Automated Data Processing (ADP), a worldwide provider of investor communications services to the financial services industry, 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, doesn’t contest the SEC’s projected $1 billion cost savings, but 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 to what he fears will be a lower rate of shareholder voting. As a result, he 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.”

Finally, individual investor Robert E. Johnson has yet a different take on the issue: he doesn’t believe 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 naïve enough to think those dollars will be used to increase shareholder value?”

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.

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 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.”

Paper versus Pixels
The SEC’s proposed ruling also seems to point out 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.”

What’s the Net?
As of our press (or, should we say, post?) 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.

To read the full version of "Dear Secretary," please visit us on the Web at www.seeseeeye.com.

see see eye works with a range of clients – from Fortune 500 companies to non-profit organizations – to develop creative and effective communications that not only fulfill SEC requirements, but also speak to important stakeholder audiences like investors. Contact Lawson Cox to find out how we can help you.

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 Web sites, branded collateral programs, annual reports and other communications targeted to customers, employees, investors and community members. Additional information can be found at the company's Web site, www.seeseeeye.com.