April 4, 2006
To Whom it May Concern,
The SEC is making as serious mistake in its recommendation to eliminate the total return chart from the proxy. As far as I can tell there are at least five good reasons to reconsider this.
1. The total return chart found in the proxy is not available on the internet. There are many charts on the internet, usually accompanied by ads but none of these charts offers a total return. These are all line charts that show the movement of a stock price from one point in time to another and usually provided on a logarithmic scale. Most of the charts available from such widely used financial sites such as YAHOO do not enable an investor to get a precise starting price nor a precise ending price because of the distortion caused by the logarithmic scaling. This requires the investor to interpolate a beginning and ending price point. They then have to compute the return. This return, however, is not a total return, it is a closing price return. This return does not include the impact of reinvested dividends and indeed subtracts out of the price any dividends that were paid. The impact of this can be substantial. In 2005 the closing price return of the SP 500 was 3.00% while its total return was 4.9% a 39% difference.
To calculate a total return the investor would have to reinvest dividends on the ex-dividend date (and at the same time it is subtracted from the stock price--the ex-dividend date). This requires the amount of the dividend and the price of the shares and must be done for each dividend paid. Assuming a quarterly dividend this is 20 additional calculations that must be made to get the five year total return. Computing this return requires more effort than most investors are willing give and reasonably sophisticated math skills. To produce this for the SP 500 would mean repeating this same process 500 times. This means there are also 500 opportunities to make a mistake. In the case of the NASDAQ Market, it would need to be done roughly 3,000 times. It does not even address the difficulties of calculating a total return when a stock dividend occurs. As a Certified Public Accountant, I know that the average investor experience serious trouble trying to complete such large calculations.
2. Information on the internet is not reliable. Its free and you get what you pay for. None of the databases Wall Street analysts use is available on the internet except at a cost. The stock pricing information is especially suspect. Due to the fact that there are hundreds of pricing mistakes made every day, pricing information must be cleaned up. Anyone who has experience with this process knows that each day there is a clean-up process and that it often takes a couple of weeks to weed out all of the bad data. Even then its not 100%. This most clearly shows up when a chart is produced that has a large up or down spike in it. Further, there is no guarantee on any of the information on the internet. Read the disclaimers.
As a bare minimum investors ought to be able to rely on the information they are getting. If a company misleads investors that is a criminal offense. If an internet millionaire does it thats just Caveat Emptor. Why is the SEC throwing investors to the wolves? Not only is this information likely to be less than accurate, it opens investors to all sorts of potential scams and data manipulation.
Inevitably, sites will offer this some of this information and just as inevitably there will be someone out there taking advantage of those trying to get this information. Is the SEC going to certify the sites for data accuracy and the protection of investors?
3. How can the SEC guarantee that the information in the proxy is going to sync-up with the information on the internet? If I wanted to get a 5-year chart beginning in 2000 and ending on December 31, 2005 today, I could not. The five year chart exists but its a rolling five year chart meaning the furthest back I could go would be April 4, 2000. Hence by the time the proxy arrives I cannot sync-up the information in the proxy with the same 5 year period on the internet.
4. The fourth thing that needs to be pointed out is that the peer group comparison in the total return graph in the proxy is the only mandated statistical comparison provided to shareholders (under the currents SEC regulations) which compares a companys performance to that of its competitors. Neither the annual report, 10K, 8K, etc, require any quantitative relative performance analysis versus competitors. The company can make all of the self-aggrandizing remarks it chooses in the annual report without indicating how this compares to the competition. Only in the total return chart in the proxy do investors see how the companys shares have performed versus a list of competitors. This is valuable information for shareholders. How else is an investor supposed to determine if profits are the result of great management or a buoyant economy?
What is so ironic here is that the SEC in its 15C reports filed quarterly by mutual funds requires relative performance total return information. It is one of the standard features used on most mutual fund screening models to determine outstanding performers in a mutual fund category. Why is the SEC taking this information away from the stock investor?
5. The fifth point I have is: What happens to those investors who do not use or have no access to the internet? Many older investors do not use the internet or use it only on a limited basis for email. This is not an insignificant number of shareholders. Older persons own more stock per capita than any other age group. Denying them the access to this information gives them only one side of the picture. To have a balanced view of executive compensation you must know what management was paid, how they did against the competition and how much benefit the investors got out of it. Anything less is simply inadequate to make a reasoned judgment on managers pay.
Thank you for the chance to comment on this important issue.
Nathaniel J. Rose