The so-called SDX Protocol, a roadmap prepared by directors, advisors and institutional investors to establish a play book for interaction between the investment community and independent corporate directors, was analyzed at the January 13 meeting of the National Association of Corporate Directors/New England.

Historically, such communication has been anathema. Directors direct; member of management, the CEO or the director of investor relations, has laboring oar in communicating with the investment community.

There is a sense that this current practice has not worked well. It may create barriers between investors and directors, leading to misunderstandings which in turn lead to a poor and destructive level of shareholder-company relations.

The SDX Protocol may not be appropriate for all companies, but larger companies with institutional investors might consider adopting some or all of that proposal. In broad outline:

The company designates one or more independent directors, not management, to speak with institutional investors.

Institutional investors designate high level representatives (not just analysts) to engage with the independent directors.

Ground rules are established to set forth topics which cannot be discussed (the kinds of things that relate to earnings or operations, typically matters typically raised in an “earnings call,” should be avoided).

A list of appropriate areas of discussion should be generated (risk management, corporate philosophy on compensation, high level strategy).

Companies must be careful in selecting the board members to speak; not all board members are going to be adept. The Protocol also contemplates the director speaking without presence of either management or third party advisors, something which makes counsel nervous and raises the risk of violation of Regulation FD (impermissible selective disclosure of material inside information).

The SDX approach is radical, and contrary to historical corporate governance. It should be undertaken only very carefully and with consultation with outside advisors. It is unclear whether SDX represents an opportunity to cut into miscommunication, or a probing invasion by institutional investors into areas which should not be generally disclosed, nor indeed selectively disclosed, to anyone.