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Proxy Disclosure

Does transparency pay off?

December 2014

With the proxy season gathering steam, a hot topic once again is transparency. As usual, calls proliferate for more and better disclosure, but some observers challenge the conventional wisdom that transparency is always a good thing. Both Alan Sorkin in The New York Times and Harvard’s Archon Fung have asked whether transparency does indeed pay off, a question that remains as provocative as ever.

Sorkin explored the issue in a DealBook article that highlights a slippery psychological problem for financial services firms: “provide too little information to the public, and you are quickly attacked for hiding and not being transparent enough; provide too much information and you are doubted for being a bit too solicitous.”

And while transparency itself can cause unpredictable outcomes, as Sorkin describes in a later Dealbook column, policy may be no more tractable. Archon Fung, co-director of the Transparency Policy Project at the Harvard Kennedy School, warns against disclosure regulations that “make organizations go through the fairly expensive processes of collecting information that nobody then goes on to use.”

Pointlessness is not Fung’s only concern. He also worries that “transparency policies and information that is relevant today will no longer be as relevant tomorrow.” Disclosure regulations that don’t keep up, that fail to target “new financial instruments and new techniques and practices,” risk obsolescence.

Unpredictable? Pointless? Obsolete? Questions about transparency are not restricted to the financial world. In its 2014 proxy statement, Coca-Cola communicated its equity compensation plan with enough transparency to attract the attention – and criticism – of money manager Wintergreen Advisors, whose CEO claimed that the board “tried to sneak one by shareholders in Coca-Cola’s proxy materials.”

In response to Wintergreen and other critics, notably Berkshire Hathaway’s Warren Buffet, Coca-Cola agreed not only to change the cash-equity mix of its compensation plan, but also to spell out actual dilution, burn rate, and overhang “every year in the proxy statement.”

Transparency can certainly yield mixed results, but it does pay off in the long term. Obfuscation might have spared Coca-Cola a spate of bad press, but all too often the practice conceals realities that will not remain hidden. Enron’s infamous, largely opaque exploitation of legal loopholes and deceptive accounting profited no one in the end, and while the Enron lesson is extreme, it is hardly unique.

Proxy statements give boards and management an occasion to profit from transparency, and not merely by forestalling negative publicity. For well over a decade, Harvard Business School’s Robert Eccles has contended that companies with fuller disclosure win more trust from investors.

But now that the mechanisms of equity compensation have become so intricate, proxy transparency requires more than just a policy decision not to conceal the truth. Even when a board does commit to transparency, making good on that pledge remains a challenge.

Effective transparency requires thoughtful planning. When a proxy statement provides not only the specifics of a compensation program, but also the program’s projected impact on shareholder value, increased investor confidence can translate into higher valuations. There are additional approaches that can enrich the impact of transparency in a proxy, but they all have one thing in common: expert communications. Astute organization, innovative graphic representation, and crystal-clear writing will go far to maximize the payoff of any transparency initiative.

Proxy Statements Revisited
The proxy as a tool for investor engagement
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