The SEC’s Silver Bullet - the eInformation Initiative

The eInformation Initiative is Big - awesome

After distilling the news from yesterday’s SEC meeting, the item that I feel holds the greatest promise for positively impacting shareholder value is what I refer to as the SEC eInformation Initiative. This incorporates issues raised both yesterday and in prior months, such as Jonathan Schwartz’s (the CEO of Sun Microsystems) request to the SEC use his personal blog as the vehicle for communicating with the investment community and the SEC’s recently announced XBRL initiative. Salient points from today’s Wall Street Journal article are provided here.

The electronic-information rule could affect nearly all
shareholders within a year or so. The rule, approved unanimously yesterday,
allows companies to distribute via the Internet annual reports and materials on
board elections and other matters put before shareholders for a vote, while
enabling investors to opt to continue to receive paper reports.

The so-called e-proxy rule will cut printing and mailing costs
for corporations. But it will also make it cheaper for activist stockholders to
launch fights against corporate boards, because shareholders of companies that
distribute information to investors electronically will be able to do
likewise.

The agency said it plans to make the e-proxy model mandatory by
January 2008, though some members expressed concern about doing that.

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Mr. Cox said the e-proxy rule — the only one approved in final
form yesterday — was one of several steps toward changing how investors access
information. It dovetails with two other technology-based initiatives Mr. Cox is
pushing. One will allow investors to quickly compare data in a corporation’s
financial statement with other companies’ data. The other is an upgrade to the
search capabilities of the SEC’s Internet-based system for storing corporate
financial reports, known as Edgar.

“We’re trying to qualitatively improve the disclosures investors
get,” he said.

Business groups have been wary of using Internet-based proxies —
the documents that outline matters put before shareholders for votes. Their main
fear is that activist investors would find it much easier to put their proposals
before all of a company’s shareholders. Consumer groups, on the other hand, have
warned that electronic proxies could disenfranchise investors who don’t use the
Internet.

Some commissioners expressed concern about making the e-proxy
rule mandatory, given other changes the SEC is weighing for the proxy process.
Commissioners also fretted that a mandatory rule might crimp participation by
shareholders without Internet access.

The SEC Moves into the 21st Century - but not without some squawking

This is great stuff. It is nice to see the SEC moving into the 21st century, even if they are dragging some constituencies kicking and screaming. It’s the same kind of push-back seen from the wire services when Mr. Schwartz petitioned the SEC for using his blog as a formal investor information dissemination platform. Disintermediating a paid service for the democratizing and flattening (not to mention free) power of the Internet is bad, right? It is if you are either Business Wire or PR News Wire. But it’s really great if you are an investor or a company.

The E-proxy Rule - A change with real teeth and a long time coming

So what of this e-proxy rule? This, in my opinion, is huge. How many people who get bulky, annoying proxy materials in the mail actually do anything with them? My guess is very few as a percentage of total proxies distributed. However, if one was to get an email with a link to the issues up for vote at the Annual Meeting of one of their portfolio companies, would that person be more inclined to repond and actually vote? My guess is yes. An unequivocal yes. I think the issue of reduced participation due to those lacking internet access is a red herring. I think the consumer groups and commissioners expressing this view are either way out of touch or on the take. I would contend that a staggeringly high percentage of people to whom proxies are sent have internet access. Further, I’d argue that the goal should be to increase overall participation, and that this represents real democracy. And if the emphasis and resources are placed at the tail end of the distribution, is the greater good really being served? I think not.

Conclusion

Now I know why business groups are afraid of this change, given the greater ease with which proxy fights could be launched. Excellent. This is good, healthy governance. It is high time that the frictions and impediments to shareholder-driven actions are gradually removed. Staggered boards and cumbersome proxy processes. to name two of many. This move is one chip at the edifice of entrenched managements, and if they are scared and lobbying against this change, screw them. And you thought Sarbox made you accountable, how about being accountable to your shareholders, pal? This is awesome.

Once again, I have to applaud Commissioner Cox for this proactive, pragmatic approach to good governance. As I’ve said in prior posts, he is a dude.