Investor Shaming, Disclosure, and Shareholder Access

The WSJ published an article suggesting the need for the elimination of some quarterly reports.  The article is here.  Wachtell Lipton circulated a memorandum that discussed efforts in Europe to seek the "discontinuation of company quarterly reporting".  

The analysis was based upon efforts this summer by "Legal & General Investment Management, a major European asset manager and global investor with over £700 billion in total assets under management" and the contacts made by the firm with "the Boards of the London Stock Exchange’s 350 largest companies to support the discontinuation of company quarterly reporting"  The memo, posted on the Harvard Governance site, is here.  

The idea of scrapping quarterly reports is largely based upon the view that these reports encourage corporate management to take short term perspectives in connection with the management of the company.  But share prices are based upon the future expectation of profits and future profits require long and short term planning. Companies like Amazon do amazingly well even with low profitability because investors believe that the company is managing in a manner that will benefit shareholders in the long term.

To the extent that companies have an excessively short term perspective, it is hard not to call this mismanagement.  The decision about the day to day business of the company is made by management and it is management that has the fiduciary obligation to manage in the best interest of investors.  Delaware courts routinely overturn efforts by shareholders to intrude into the ordinary business of the company and the SEC staff use this prohibition as a significant basis for excluding proposals under Rule 14a-8.  The idea of protecting management from short term strategies by denying investors information is really a form of blaming or "shaming" investors for the failures of those managing the company.

Moreover, the elimination of some quarterly reports needs to be considered in the context of the fight over shareholder access.  Long term shareholders want the right to include nominees in the company's proxy statement.  In this proxy season, a record number of shareholder access proposals were submitted.  Of the 81 proposals that went to a vote, only "[t]wo companies, including Citigroup, determined to support the proxy access shareholder proposal contained in their proxy statements." In other words, for the most part, management objected to a process that would make easier the election of directors nominated by large shareholders. Of course, shareholders had other ideas, providing majority support for 48 proposals and giving all 81 an average of 54.7%.  

So putting these together, companies will be better run if the owners of the business receive less relevant information and are excluded from participation in the board of directors. That is certainly a point of view but one unlikely to receive much traction for actual owners.  

J Robert Brown Jr.