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Cox Promotes Better Shareholder Communications

In a speech at Stanford Law School's Directors' College, SEC Chairman Christopher Cox talked about the increase in shareholder activism, executive compensation and the use of interactive data to make financial information more useful. Mr. Cox said the gradual evolution of publicly owned companies may eventually lead to a divergence of interests between shareholders and management. As more Americans own stocks, more will ask hard questions and make demands, he said.

Mr. Cox cited reports that during the current proxy season, 70 companies have approved shareholder proposals that will make it easier for shareholders to terminate directors. Another 38 companies saw the approval of resolutions calling for an end to staggered elections of directors. Mr. Cox said that more than half of the largest 500 companies that file with the SEC will now hold annual elections for the full board of directors. Shareholders at 32 companies voted for directors to be elected with a majority of shares cast, while over 100 companies voluntarily adopted this initiative. Mr. Cox advised that 145 other companies in the S&P 500 already elect directors by a majority of votes that are cast or require directors to withdraw if they do not receive majority support.

Four companies yielded to shareholder pressure on executive compensation and adopted proposals to tie compensation to company performance. Seven companies saw the passage of shareholder resolutions to limit executives' severance pay. Mr. Cox noted that some groups have questioned whether this type of shareholder activism is a good thing, or whether shareholders in general lack the sophistication to make these decisions. Others are concerned about those who may have political or social agendas unrelated to returns on investment. Mr. Cox pointed to evidence that suggests that shareholders do not vote for agendas that do not have a basis in economic reality. Empirical data suggest that companies which are responsive to shareholders tend to be more profitable, according to Chairman Cox.

Chairman Cox referred to recent evidence that links company profitability to friendly shareholder communications. He said a University of Michigan study found that companies with understandable annual reports perform better, while those that obscure the facts tend to underperform. He added that the use of plain English, both at the SEC and in the boardroom, is one of the best ways to satisfy shareholders' demands for better information.

Executive compensation is a prime example, he said. The SEC's proposal on executive compensation has received a greater response than any other proposal in its history, according to the chairman. He believes that both shareholders and directors must clearly understand what executives are being paid.

Mr. Cox urged members of compensation committees to clearly explain to shareholders why they acted as they did. "You undoubtedly have good reasons," he said, and "share them with your investors."

Finally, the chairman promoted the use of interactive data to make financial information such as executive compensation more useful. He noted that an increasing number of companies are participating in the SEC's pilot program on the use of interactive data in SEC filings. He reported that last week, four additional companies joined the program--Automatic Data Processing, Ford Motor Co., Ford Motor Credit Co. and Radyne Corp. Interactive data has the potential to completely transform the way the world shares and uses financial information, according to Chairman Cox.