Board Blogs

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WhycorporateboardsshouldblogBy Dominic Jones and Pam Agnew, ABC | IR Web Report January 11, 2005

DESPITE all the changes that new laws like Sarbanes-Oxley have brought to how companies aregoverned and managed, one thing has still not changed: directors still don't talk to their shareholders.

Sure, boards and directors may have private meetings with highpowered institutional investors on issues of corporategovernance, but they almost never communicate in an informalway with rank and file shareholders and other stakeholders.

The blogging technology platform, when properly executed,provides boards and legitimate shareholders with a transparentplatform to seriously engage one another on the issues. It canprovide boards with a low-cost, highly effective means toestablish a credible dialogue and allow directors to obtainfeedback from a wider variety of shareholders with differing viewpoints.

Blogging provides acredible platform forongoing board-shareownercommunication.

To be sure, the concept of director bloggers is a new and dramatically different approach to board-shareholder communication. However, this is simply a case of taking an existing, proven technologyand customizing it slightly for another purpose.

After carefully studying how blogs work and how the blogging community interacts, we are convincedthat the technology offers a highly attractive opportunity for forward-thinking directors and boards. Itenables boards to get their message out, and at the same time provide a forum for shareholders tooffer informal input to their elected board representatives.

ThecurrentmodelisbrokenIn spite of all the upheavals in boardrooms recently, directors are still as inaccessible as they'vealways been. They're largely cut off from the people they are supposed to represent. Except for theannual meeting and annual reports, shareholders rarely hear from directors.

Boards themselves seem to recognize that there is a problem. This month, the Conference Boardissued a report on the future of annual meetings. It says there is frustration that annual meetings arenot effective forums for discussion. "Formal annual meetings do not lend themselves to serious,informal discussion," the report says.

The report's key recommendations include using the Web more in shareholder communications andannual meetings, and creating "a series of alternate forums where investors and corporatemanagement can examine critical, long-term issues."

Similarly, in a joint National Association of Corporate Directors and Council of Institutional Investorstask force report in March 2004, both sides agreed that current practice isn't working."Many shareowners have been frustrated over the years by what they see as a wall between them andtheir elected representatives, the board of directors. They feel that they have no input into selectingdirector nominees, no meaningful choice in their election, and, generally, no hope of ever hearing fromor exchanging views with them," said the task force's 24-page report (PDF 138KB)

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Ultimately, though, if directors want evidence that the current model is broken, then the real test mustbe shareholder sentiment and awareness. And that's where the evidence is that boards andmanagements still have a long way to go.

Last week, General Motors launched a blog for vice-chairman Bob Lutz. Most of the discussion in theearly stages has centred on vehicle design.

A recent telephone survey of 2,152 workers and 1,880 investors conducted between November 5 and14, 2004 by Rasmussen Reports, an independent public opinion research firm, found that 80% of U.S.workers and 76% of employed investors had never heard of the Sarbanes-Oxley Act.

Among working investors, defined as owning at least $5,000 in stocks, bonds and mutual funds, only7% indicated that Sarbanes-Oxley had increased their confidence as an investor. Likewise among thisgroup, only 7% said it had increased their confidence in the leadership of public companies.

So, despite companies spending millions of dollars and hundreds of hours meeting new Sarbanes-Oxley requirements, there is very little awareness from the public at large. This can't be helpful tobusiness, especially if it wants to have its voice heard on public policy.

BoardsmustreachoutandcommunicatetheirstoryClearly, directors must accept that governance done behind closed doors is not governance seen tobe done. Companies and boards will not get credit for the improvements and efforts they've madeunless they tell people about them.

Boards need to be more accessible to shareholders -- and the Internet, more especially the bloggingapproach to Internet communications, is the best way toachieve this.

A directors' blog would be an inexpensive, technically simple,but highly honest way for people to interact and dialogue on theWeb under a set of accepted rules. Blogging sites includefeatures that can give corporate boards a direct link to thedesktops of people who care about the company, regardless ofhow many shares they own.

A directors' blog is aninexpensive, simple touse and inherentlytransparent medium forserious, informaldialogue.

Blogging is a more honest and inclusive way of communicating

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on the Web because it is difficult for any one party to dominate the discourse. Shareholders would beable to comment on Web postings by directors and other commentators. They would also be able topost comments on their own blogs and have these linked from the board's blog. Anyone with a right tohave their say as a shareholder would have an opportunity to do so.

A board blog is like an electronic Town Hall, something recommended by former SEC chair RichardBreeden in his report on WorldCom and now being implemented by the renamed MCI. Except thatwith a blog, the board has a perpetual online meeting. It can call together shareholders at any time toseek input or inform them of important developments at the board level. It's a highly effective way forboards to keep shareholders informed of what they are doing at a negligible annual cost.

HowboardbloggingwouldworkBoard blogging is not as radical an idea as it might sound. Blogging has recently been given credibilityby some high profile companies. Last week, for instance, General Motors vice-chairman Bob Lutzlaunched a blog which is little more than a sales tool, but which promises to be more. He follows thelikes of Sun Microsystems' Johnathan Swartz. And SAP AG has one of the best executive blogprograms on the Web. In fact, blogging is less radical than the discussion forums which forward-

thinking companies like Shell, with its Tell Shell forum, host on their sites.

Furthermore, blogging technology would help boards to more easily implement the recommendationsof the joint NACD and CII task force on shareholder communication. In their report, the twoorganizations call for boards to improve shareholder communication on the Web by posting all "non-trivial" shareholder questions and the company's answers on the Web to "help ensure a regularstream of information of interest to shareholders."

With traditional websites, providing a regular stream of questions and board answers is burdensomeand time consuming. That may explain why, almost a year later, none of the more than 500 companieswe track, currently meets the joint task force's best practices.

Managing comments is easy to administer

Blogging software makes the process of receiving and responding to questions and issues easy forboards to control and manage. They can establish and enforce rules of procedure for questions andcomments on the blog. Boards would have the option to permit questions to be posted immediatelywithout prescreening, or to have them go into a queue to await approval for posting.By setting up the site so that only shareholders with a valid identifiable code would be able to postquestions, the system would be more efficient than the current practice of receiving questions via anopen email address or email form. There would be fewer misdirected questions from general traffic tothe company's website.

The commenting system would be directly owned and administered by the board, or an appointedoutside intermediary, to give directors guaranteed unfiltered access to the questions fromshareholders. Shareholders, in turn, would also gain greater confidence knowing that the board willhear them uncensored.

Trackbacks keep communication honest and transparentOf course, boards may agonize at the prospect of having to exercise judgment over what comments topermit and which to exclude. And some shareholders would be skeptical of the openness of thedebate if boards were seen to have total control.

However, the blogging medium offers a counterbalance to the board's control over any debate througha technology called trackbacking. Trackbacks allow anyone with a blog, or in this case shareholders ofyour company who have a blog, to provide a link from a post on your site to a related post on theirs.

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For example, if Calpers decides to respond to something on your board blog, it can write and post itscomment on its own blog, then issue a trackback ping that would alert shareholders on the board'sblog that Calpers has a related post on its site.

Trackbacks are an insurance policy for transparency because even if you delete a trackback from yourblog or refuse to post Calpers' comments on your site, people who search the Web or follow othertrackbacks are likely to find Calpers' post anyway.

It seems, though, that boards have little to worry about when it comes to maintaining an orderlydiscourse via a blog. The experience thus far in the blogosphere, which is much less controlled than aboard blog environment, is that there is very little unruly behavior.

This is especially so of trackbacks. It seems that when people or organizations post responses on theirown sites, they tend to be more careful and considered in what they say because they are moreaccountable.

Noted Internet commentator and academic Clay Shirkey notes in a November 2004 essay thatweblogs provide "proof that you can have broadly open discourse without suffering from hijacking by(nuisance commentators), by creating a social structure that encourages or deflects certainbehaviors."

Sowhatwouldboardsblogabout?Anything they want. The board blog could be used to give investors updates on the board and itscommittees' activities. It could be used to solicit input from shareholders on issues. Such input wouldhelp directors to make decisions with the benefit of having some understanding of where shareholdersentiment rests.

In their joint report on shareholder communications both directors and investors agreed that sometopics open for discussion would include:

Board policies and procedures. Board structure, size, and tenure changes. Director nominations (suggesting qualified nominees) Director selection and evaluation (suggesting criteria for individuals and board). Shareowner proposals, including those addressing corporate governance issues and corporate

responsibility issues. Discussions on major corporate events, such as mergers and acquisitions, capital changes.

Indeed, the agenda could include all of the current issues that get discussed with institutional investorsbehind closed doors. Only, in the blog environment all shareholders would be party to the discussions.

They would be able to read both sides of an argument and come to their own, more informed

conclusions. This type of open communication forum achieves precisely the objectives contained inthe Conference Board's report on the future of the annual meeting.

WhataboutRegulationFD?The legal risks of board communications are always an issue, but nothing under current regulationswould prevent boards establishing their own websites using the blogging platform.

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Indeed, because a blog can be viewed by anyone and comes with an inbuilt syndication system via atechnology called RSS, blogging would reduce the already minimal risk of boards releasing materialinformation selectively and thus falling foul of Regulation FD.

Furthermore, if boards hold fewer private meetings with shareholders as a result of having a publiclyaccessible blog, there'd be even less opportunity for selective disclosure, since the information wouldbe available to any shareholder at the same time as all others. All they'd need to do is subscribe to theboard's RSS feed.

PotentialtooffsetproxyadvisorpowerandreduceproposalsBlogging technology offers a highly effective and credible way for boards to open the channels ofcommunication. By limiting participation in the blog to only legitimate shareholders, a blog can providea more informal way for boards and shareholders to virtually look each other in the eye.

Blogging would bring members of corporate boards closer to their shareholders. It would help boardsto explain their positions on key issues, and it would give shareholders an opportunity to communicatedirectly with the board and other shareholders in an open, but regulated forum.

Since shareholders would have access to the arguments and positions of a full spectrum ofstakeholders, they would have more information on which to make up their own minds. This wouldconceivably reduce the influence that proxy advisory firms like Institutional Shareholder Services andGlass Lewis currently have on the proxy voting decisions of institutional investors as both boards andtheir shareholders would have a means to test the waters of where sentiment on any particular issuelies.

The open communications model of blogging would lead to serious, open dialogue between directorsand the shareholders they represent. It would bring credibility back to boards of directors andultimately lead to better relations between directors, management, employees, shareholders and otherstakeholders.Ultimately, the benefit of board blogs are the same as any good shareholder communication program.

As the NACD and CII joint report states, "one of the more tangible benefits of improved board-shareowner communication may be that investors' use of shareowner proposals -- long consideredone of the most direct ways to communicate concerns to and start dialogues with boards -- maydecline in the future as shareowners become more comfortable, and eventually satisfied, withalternate methods of communicating with directors."

DID YOU KNOW? IRWebReport.com has been helping leading IR departments around the worldimprove their online communications practices since 2001. Visit us today to learn how we can helpyour company attract and engage investors on its website. www.irwebreport.com.

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