Shareholder Engagement Leads to “Preferential Disclosure,” Study Says

Anyone involved in shareholder engagement understands the implications of Regulation Fair Disclosure (Reg FD), an SEC rule requiring public companies to disclose any material non-public information that they shared with private individuals (such as investors). 

However, a new study finds that even with the best of intentions, companies may be sharing more with investors than they think – leading to an unlevel playing field.

What it says: The University of Iowa study tested 273 experienced Heads of Investor Relations with hypothetical investor questions, and found that they provided more useful private disclosures to “more preferred” investors, that materiality concerns did not reduce preferential disclosure, and that preferred investors were more likely to receive access to the CEO.

What it means: Alarmingly, the researchers were so taken aback by the results of the study that they are considering calling for the SEC to prohibit private investor meetings altogether. This would clearly be disadvantageous to both companies and investors, as studies have found numerous benefits to direct shareholder engagement.

• DealBook founder Andrew Sorkin recently suggested something similar in a NYT op-ed, citing an imbalance between retail and big investors.
  
  
• The SEC recently settled a case against a Fortune 100 company for alleged Regulation FD violations, claiming executives disclosed private information to a group of investors.

An alternative to no investor meetings: requiring that all investor meetings be publicly webcast, similar to Progressive’s policy, which states: 

“The Company will conduct one major investor relations meeting a year and will simultaneously webcast the meeting over the Internet.  The purpose of the meeting is to share our business strategies, not to discuss historical results.  We do not supplement this annual meeting with visits from analysts because we do not give preference to any individual or security firm and wish to avoid the appearance of any such preference.  From time to time investors or prospective investors (i.e., those who buy or sell our securities) may visit us, but these meetings will not be a forum for sharing nonpublic information.”

In the meantime, companies should ensure that anyone engaging with investors or preparing others to do so (such as directors) is fully briefed on a) the requirements of Reg FD and b) what information the company considers to be material and nonpublic.