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Forum Report: Fair Investor Access
What Sources Should Investors Rely Upon?
Quality of
information sources
Application to
proxy advisors
Forum
support of responsible sources
Reacting to recently distributed reports, several Forum participants have
encouraged us to consider very practical questions about what sources
investors should rely upon for decision-making information. The issue has
been raised on a conceptual level in evolving views of the
responsibilities assigned to corporate board members and to investors,
and on a marketplace level in surveys that confirm what we observe about
investor preferences for direct sources.
The
need to eliminate confusion has also been seen in our observation of
activist proposals that are designed to satisfy the interests of some
investors at the expense of others,
and particularly in the recent spectacle of a celebrity investor valuation
controversy that has corrupted the trading market for the subject
company’s stock.
Quality of information sources
Reliance should of course be based on the responsibility of the source and
its ability to provide the information, and we should also consider the
biases a source may have. In this analysis, it is clear that investor
preferences for direct management sources of information are rational.
Corporate managers
·
Responsible for maintaining and reporting all relevant information, and
the primary source for all other providers of information
· Responsible
for the company’s management, therefore know what information is relevant
·
The
only source with actual responsibility to address investor interests
· Bias
relating to career interests in managing the company, possibly also in
stock options or similar interests in current market pricing of company
securities
Investors, including activists
· No
actual responsibilities to other investors, other than to refrain from
illegal lying or cheating
· Intermediary
source of factual information generally available to other investors
directly from company or other sources; primary source of its own analyses
and views
· May
have situation-specific common interests with other investors, but in
fact each investor has its own interests relating to a particular holding
as well as a potentially competitive relationship to other investors in
securities trading or to rival portfolio managers in marketing their funds
Advisors and research providers
· May
have regulatory responsibilities, depending on the nature of service being
provided, but generally responsibility is limited to a commercial
obligation to deliver what has been promised to the investor
· Intermediary
source of factual information, with access to sources more limited than
that of shareholders with rights to corporate disclosure; primary source
of proprietary analyses and opinions
· Bias
depends on commercial profit objectives of the service, whether
subscription sales or support of related transaction services, may be
influenced by interests in other relationships
Assuming most companies are managed by directors and officers who
appreciate the need to win investor support, corporate managers and
investors should share a common interest in (a) establishing broad respect
of corporate management responsibilities for addressing investor
interests, and (b) encouraging the development of more effective
communication processes to support management’s understanding and response
to investor interests.
Application to proxy advisors
One
application that deserves our thinking before the start of this year’s
annual meeting season is the widespread reliance on commercial sources of
voting recommendations. Though these services are broadly criticized, many
sophisticated and responsible institutional investors accept the
limitations of bureaucratic recommendations as a very cost-efficient
means of identifying situations that justify higher cost staff attention.
This approach could be taken an extra step. Viewed as a matter of investor
responsibility, each case of a difference between the recommendation of a
proxy advisor and the recommendation of a company’s management could be
viewed as requiring the investor’s careful review and fully informed
decision. Being informed, of course, would necessarily include considering
information and explanations provided directly by the company’s
management.
Treating any disagreement between proxy advisor and management
recommendations as a requirement of decision-maker review could actually
prove valuable to each of the parties. Corporate managers would be assured
opportunities to communicate directly with their investors, without
filtering, and investors would have more convenient access to their
preferred source of information. Even the proxy advisors might benefit
from the reduced burden of responsibility for their advice, and the
associated reduction in liability exposure.
For
those of you concerned with the fiduciary duties of fund managers, your
views of this will be especially appreciated. If the commercial
recommendation of a proxy advisor based on limited information differs
from that of fully informed corporate directors who actually have
responsibilities to manage a company and address its investors’ interests,
can a fund manager reasonably follow the proxy advisor’s recommendation
without a diligent inquiry of corporate management to understand the
issues and make an informed decision?
Forum support of
responsible sources
The current issues of information reliability also require fresh thinking
about what the Forum could be doing to better support the responsibilities
of corporate managers, not only in our communication processes but also in
helping to define the issues that are relevant to investors interests.
Though our policy has been to allow anyone with an interest to initiate
programs, actual practice starting with the initial NYSSA programs has
been to rely primarily on professional investors to define the issues we
address. Some companies have followed Amazon’s example in 2000 to offer
leadership of programs that were requested by investors, and some
corporate managers have initiated the requests themselves, but our
traditional approach is clearly not designed to make the Forum’s
independently moderated programs a conveniently available resource for
corporate managers who want to satisfy their responsibilities to
investors.
♦♦♦
Please offer your suggestions. What should we be doing to respect
and encourage a corporate manager’s response to investor interests, and to
assure the orderly exchanges of information and views required for
rational investment decisions?
GL – February 6, 2013
Gary
Lutin
Chairman, The Shareholder Forum
575
Madison Avenue, New York, New York 10022
Tel:
212-605-0335
Email:
gl@shareholderforum.com
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