No Freedom of Speech for Executives

Champions of corporate transparency believe that dialog between shareholders, executives and directors is essential. Yet a big hurdle remains. Regulations at the U.S. Securities & Exchange Commission strictly regulate not just what can be said, but where and to whom it can be said.

Known as Regulation Fair Disclosure or "Reg FD," the rule has been around since 2000 although there have been relatively few investigations or prosecutions involving it.The SEC is said to be reviewing it in light of Chairman Christopher Cox's efforts to bring corporate governance into the digital age.

A recent report from the Millstein Center for Corporate Governance and Performance at the Yale School of Management notes that there isn't as much communication as there could be, but there are ways to encourage a free dialogue without violating Reg FD.

The report by Stephen Davis and Stephen Aolgna states that"there is very little evidence suggesting that boards and shareholders are regularly engaging one another in sustained two-way dialogues on governance matters".

In the communication vacuum, stereotypes prevail. Executives and directors "see certain individual investors as gadflies more interested in becoming the center of attention at annual shareholders meetings rather than raising substantive topics for discussion." Some hedge fund managers are viewed as "falsely projecting an image of good stewardship in an effort to glean inside information so as to profit in the short term," the report says.

Davis and Alogna, however, believe that educating directors on what can be stated without running afoul of Reg FD can do much to facilitate communication. Doing so might incur extra costs to lawyers to brief the boards. The SEC could help by issuing guidance that states more clearly what the rules are, they say.

Some in the corporate world, especially in tech, think that Reg FD handcuffs their companies from using more modern, web-based ways of talking such as blogs. Ardent blog proponent Jonathan Schwartz, head of Sun Microsystems, says he has to talk over with his lawyer what he can and can't say on his blog. In 2006, he wrote to Cox at the SEC calling for more clarity on Reg FD.