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Corporate governance

SEC Updates Website and Electronic Guidance

The SEC released its last extensive guidance on the use of websites and electronic media in 2000.  Of course, the Internet has changed A LOT since 2000.  Faster bandwidth, new technologies, and the explosion of mobile devices and social networking have all substantially altered what companies put on all areas of the websites, not just their Investor Relations pages.

SEC Updating Guidance on the Use of Web Sites and Electronic Media

On Wednesday July, 30, the SEC voted unanimously to update and provide new guidance to publicly traded companies in the US about how they can comply with securities laws when using their websites and other methods to publish information for investors.

The effect on IR sites could be big with the guidelines providing additionally acceptable materials for inclusion as well as potentially marking some materials as inappropriate for publication on a company’s IR site.

The new SEC guidance will be issued in the form of an interpretive release.  An interpretive release does not create new laws or regulations.  Instead, an interpretive release declares the SEC’s views and interpretations of existing laws and regulations.  Thus, no new restrictions or loosening of the same are forthcoming, but areas in which companies may have been cautious due to the possibility of varying interpretations may be clarified thus allowing for broader use of IR sites and the Internet in general.

Indeed, SEC Chairman Christopher Cox specifically mentioned “social networks” in his remarks on Wednesday.

“The last time the SEC issued guidance in this area, the idea of ‘social networks’ hadn’t yet been developed, and creating a social network where shareholders could meet and exchange views was barely imaginable.”

The SEC’s guidance will be divided into four parts:

  • Clarification of how information posted on a company website can be considered “public” and guidance on complying with Regulation FD.
  • Clarification of the liability framework for certain types of electronic disclosure.  Of note, is that companies cannot require users to waive any protections from federal securities laws as a condition of participating in forums or blogs.  Also, included is guidance on linking to third party information without having to “adopt” such information.  How companies can provide historical data without it being considered “republished.”  Clarification of how anti-fraud positions apply to postings my by the company or on behalf of the company in blogs and forums.
  • Clarification of which information is not generally subject to the Sarbanes-Oxley Act regarding “disclosure controls and procedures.”
  • Clarification that information may not need to satisfy the “printer friendly” standard in some cases, which would free companies to use “dynamic” technologies.
The full interpretive release is to be published on the SEC website “as soon as possible,” and will take effect upon publication in the Federal Register.

SEC Press Release 2008-158

Rating The Corporate Governance Raters

Corporate governance attracts much public attention since it purportedly involves the economic-financial health of corporations and society in general. However, corporate governance is poorly defined because it typically is composed of differing mix of policies, procedures, internal practices all surrounded by laws and regulations.

Simply put –

…the overall purpose of corporate governance, which is to align as nearly as possible the interests of individuals, corporations and society.
Theories of Corporate Governance Edited by Thomas Clarke

OK maybe that’s too simple. Here is a definition from Investopidia —

“Good corporate governance is a situation in which a company complies with all of its governance policies and applicable government regulations (such as the Sarbanes-Oxley Act of 2002) in order to look out for the interests of the company’s investors and other stakeholders.

The corporate need to be in compliance with corporate governance has shaped an industry of advisers, rating firms and other services with an estimated 2008 sales of $52 billion (corp-integrity.com). Perhaps the most influential of these companies are the rating agencies. These firms – which include the Corporate Library and RiskMetrics Group’s ISS Governance Services and S&P – analyze companies against their own criteria and rate whether a company is well governed or not.

These ratings may influence a company’s cost of capital, equity share price and shareowner relations. As such, the companies that compile these ratings have achieved a significant presence in world financial markets. But, there are some problems — extensive studies indicate these ratings bear little relation to actual corporate performance. A recent Fortune article summarized a Stanford University study widely different ratings for individual companies.

The Stanford researchers summarized their findings–

We examine these claims for the commercial corporate governance ratings produced
for 2005 by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services),
GovernanceMetrics International, and The Corporate Library. Our results indicate that the level of predictive validity for these ratings are well below the threshold necessary to support the bold claims made for them by these commercial firms.(Emphasis added) Moreover, we find no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.
Rating the Ratings: How Good Are Commercial Governance Ratings? Rock Center for Corporate Governance Stanford University

A summary of this report is available. The Stanford study is one of a number of other similar studies that question the value of these ratings agencies. Some common themes in these studies include —

  • Over reliance on quantitative accounting/financial criteria
  • “You can’t legislate compliance”
  • More emphasis needed on observable qualitative criteria, such as corporate culture, drivers of employee behavior and corporate integrity practices.

This post only touches the surface of this important subject. Future posts will cover additional aspects of Corporate Governance ratings and related topics. In the meantime, here is a Canadian company that just might be a model of effective Corporate Governance practices —

Note the focus on Integrity, the public display of an “Integrity Hotline” and a clear display of compliance documents. Criteria the rating agencies miss.

Naming the insiders: Stora Enso

If appropriate, companies should have an insider trading policy, and this should be clearly communicated to everyone concerned. Then everybody knows what is expected.

Stora Enso provide their policy online, but also go one step further by listing those individuals who qualify as insiders – and to whom, therefore, the policy applies. I have also seen the ‘closed periods’ listed, during which these people may not trade in the company securities, but it isn’t there at the moment. Perhaps this information is only provided around those periods.

Stora Enso Insider Trading Policy