SHAREHOLDER COMMUNICATIONS AND INVESTOR RELATIONS
By Shelby L. Cates, CPA,

Shareholder questions are expanding beyond the boundaries of annual meetings and receiving more attention during the year due to a number of powerful new developments, including SEC rule changes, stock exchange listing requirements, and "best practices" identified in special reports by trade groups. All these changes address a growing sense of frustration among shareholders who feel their views are not welcome or heard in boardrooms by their elected representatives.

Responsibility

Companies typically assign the responsibility for responding to shareholder questions and processing shareholder communications to an individual or group of individuals in management, such as a separate investor relations group or to the corporate secretary, chief financial officer, or chief counsel.

In the past, the directors' responsibility for shareholder questions was limited. Some companies may not have required directors to attend the annual meeting, or let them respond to shareholder questions. Instead, the vehicle most often used for expressing shareholder dissent was the shareholder resolution submitted by labor unions, social groups, corporate gadflies and others as part of the annual proxy process.

Today, there is a subtle but growing trend toward resolving differences through more frequent and constructive dialogue between shareholders and directors, thanks in part to recent SEC rule changes.

Rule Changes

An SEC rule on "Communications Between Security Holders and Boards of Directors" that took effect in 2004 requires that companies either establish processes for shareholders to send communications to board members, or explain why they have not done so.

Recent revisions to NYSE listing standards require that companies disclose a method for interested parties, including shareholders, to communicate directly with either the presiding director of the board's executive sessions of non-management directors or with the non-management directors as a group. Even if a company is not listed on the NYSE, its shareholders may consider this a best practice and question why a company does not meet this standard.

Reports of Best Practices

Other emerging best practices can be found in a report issued by the National Association of Corporate Directors and the Council of Institutional Investors.

These two organizations formed a task force to study best practices in and impediments to more open communications between shareholders and directors. Their report, Framework and Tools for Improving Board-Shareholder Communications, is designed to build on the regulatory initiatives by offering practical suggestions.

The suggested best practices:

• The starting point for board-shareholder communications is an ongoing communications program.
• Boards should provide detailed contact information for the appropriate management representative and at least one independent director.
• Boards should develop and disclose communications policies covering all forms of communication, including in-person meetings, telephone calls, e-mail, and other written communications.
• Boards should agree on which issues are appropriate for them to address and which are appropriate for management.
• Boards should take an active role in ensuring that communications efforts and policies are up to date and effective.

Regulation Fair Disclosure and Earnings Guidance

In developing the kinds of policies suggested as best practices, companies will need to keep in mind the SEC's Regulation Fair Disclosure, (Regulation FD), which prohibits selective disclosure of material non-public information to one investor or selected groups of investors. This rule has proved frustrating to companies that are tracked by securities analysts and/or release earnings guidance.

Research shows the percentage of large companies that release earnings guidance has dropped from 72 percent in 2003 to 55 percent in 2004, a matter of concern to securities analysts, shareholders who rely on the reports of these analysts, and others who see it as an impairment of rights under the first amendment.

In response to concerns about the unintended consequences of Regulation FD and other matters, the National Investor Relations Institute and the CFA Centre for Financial Market Integrity released a report on Best Practice Guidelines Governing Analyst/Corporate Issuer Relations.

In addition to spelling out rules of conduct for securities analysts, the report suggests a series of best practices that involve the establishment and disclosure of corporate policies setting forth how the company will respond to requests for access to knowledgeable company officials and other qualified persons, including analysts and investors. The report suggests these policies should specifically address one-on-one meetings and industry conferences.

The report also suggests guidelines for the types of information that companies should disclose, depending on whether they choose to provide or not provide earnings guidance.

• Companies that provide guidance should supply the components of earnings (revenues, expenses, gains, losses, margins, earnings per share, etc.), as well as a sensitivity analysis.
• Companies that don't provide earnings guidance should (1) provide and discuss five-year growth rate projections to ensure a long-term focus, (2) discuss the issuer's business cycle and relevance to the current quarter, pointing out any obvious omission of fact, and (3) discuss each quarter's contribution to the company's long-term strategy.

Shareholders of companies that are followed by securities analysts may raise questions about the company's policies and the extent to which the policies meet the best practices described in the report.

Shelby L. Cates CPA, is a senior manager with Mengel, Metzger, Barr & Co. LLP.  She may be reached by telephone at 585-423-1860.