Disclosure reform starts with your proxy statement

One of the biggest problems with disclosure reform is deciding which disclosures help investors make better decisions and which could be eliminated to streamline documents without harming investors. Reform advocates have also complained that some disclosure rules are outmoded and should be eliminated.

Robert Lamm, chair of the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals and a former corporate secretary who is now Advisory Director of DG3 Disclosure Services, says governance professionals who want to see disclosure reform should advocate for changes ahead of SEC rules. He also suggests they start incorporating some of the changes they’d like to see into their own proxy statements.

Because proxy statements reach a broad swath of people, including regulators, analysts, the press and different levels of investors, Lamm says it is important that any information disclosed is ‘full and fair disclosure,’ but also ‘tells a good story without ever shrinking from the required disclosure.’ He says companies can engage in their own form of disclosure reform by using the proxy statement to communicate specific things to shareholders and others that work to the company’s advantage. He advises companies to stop looking at the proxy statement as a dreaded, legally mandated disclosure and start viewing it as a critical and helpful communication tool.

‘Disclosure can – and should – be communication,’ he explains. ‘It is no longer acceptable to have page after page and paragraph after paragraph of text. You have to highlight the information that people are really interested in and make it easier for people to read.’

Lamm says making disclosures more inviting and easier to read is critical because in today’s fast-paced, data-driven world, shareholders and regulators rarely have time to sort through the details of documents that are routinely 100 pages long. Lamm recalls in 2011, when he was with Pfizer, one institutional investor said it spent only about 20 minutes reading the proxy statement and that the investor’s proxy committee spent even less time than that. He was shocked.

‘So here is this document that dozens of people spend hundreds of hours working on – proofreading, drafting, fact checking, rounds of alterations with a financial printer – and it barely gets a glance,’ he says. ‘That really tells me that companies need to do a better job of communicating.’

Many companies are communicating what’s really important for investors to know in the executive summary of the CD&A. ‘The first couple of pages of the compensation section of the proxy statement can really tell the whole story,’ he adds, noting that ‘very often, that’s all the investor sees.’

To communicate better with investors and others, Lamm suggests that companies:

• Use plain English
• Reformat long text paragraphs into bullet points and use headings to identify important topics
• Emphasize company strengths while fully complying with disclosure requirements
• Use color, charts and graphs to highlight important data investors need

Companies can obtain external help to improve their proxy disclosures – expert firms that focus on disclosure enhancement and optimization.  ‘DG3 Disclosure Services is one of these firms, with a vision to help companies better connect with their shareholders,’ Lamm says.  ‘But it’s also important to note that the end result is not just to have a prettier proxy.  At the end of the day, it’s about getting out the vote, which is increasingly challenging given rule changes and the growing significance of broker non-votes.  Improved disclosure enables companies to connect with their owners and can generate better voting results.’

There is increasing discussion of disclosure reforms that Lamm believes could be helpful. Some suggest boilerplate information such as the role of each committee and declarations that directors are ‘independent’ could be omitted from the proxy statement to shorten its length. ‘That stuff is probably known by a large number of people who read the proxy statement and it doesn’t change very much year to year,’ he notes. ‘It is likely already on your website, so why not take it out of the proxy statement?’

Additionally, he says he has heard some board members advocate for taking the obligatory disclosures about committees out of the proxy statement in favor of adding disclosure on ‘what each committee has actually done in the past year, how it has earned its keep and how it has improved processes.’

The SEC, the private bar and some in-house practitioners have responded cautiously to such proposals because of potential complications. For example, Lamm says one question that needs clarification is, ‘If you have a link to the website, does that mean that everything you say on your website is somehow dragged into your proxy statement?’

Disclosure advocates hope that such questions can be resolved so that all disclosures can be easier to read and more informative in the future.

‘I think you’re seeing a convergence of all sorts of developments involving disclosure reform,’ says Lamm, but he cautions, ‘This is a long-term evolution.’

Bob Lamm

Bob Lamm, through Robert B. Lamm, P.A., is Advisory Director, Disclosure Services, to DG3, a global document management and financial printing firm.  He is a member of the Society of Corporate Secretaries and Governance Professionals and serves as Chair of its Securities Law Committee.  Bob is also a Senior Fellow of The Governance Center of The Conference Board.  Bob previously held senior legal positions at several large companies, most recently as Assistant General Counsel and Assistant Secretary at Pfizer Inc.  He also has extensive experience with small- and mid-cap companies as well as non-profit entities.  He received a Bachelor of Arts from Brandeis University and a Juris Doctor from the University of Pennsylvania School of Law. He frequently speaks and writes on securities law, corporate governance and related topics.