Based on discussions with Forum participants during the past couple of weeks, the following issues are expected to be among those addressed at tomorrow afternoon’s open meeting of the Options Policies Forum (an updated agenda is copied below):  

Authorized use of capital:  In defining a marketplace consensus of broadly accepted principles as a foundation for healthy competition, it may be desirable to distinguish between the question of whether a company’s use of capital is “authorized” and the very different judgment about whether the use is wise.  For example, management’s failure to report how capital is used, or its use of capital in ways that were not presented as a condition of investment, might be considered “unauthorized.” Arguably, that should be distinguished from any properly reported use of capital, and treated differently.  If investors know how executives are being compensated, for example, they can then make an informed investment decision either about committing capital to the company or about voting for its directors.

Adaptive indexing:  A determination that a company’s use of capital is unauthorized would raises a question about the legitimacy of investing in the company.  That in turn raises questions about whether such a company should be eliminated from an index fund.  Aside from the fiduciary concerns about allowing unauthorized use of funds, there are practical issues relating to the administrative costs of modifying an indexed portfolio as well as theoretical issues relating to the integrity of what is intended to be a passive sampling of the economy as defined by the marketplace.

Information needed by investors:  There is a very wide range of views among analysts and economists about how to treat the costs of options to a company’s shareholders.  Accommodating the needs of different analytical methods may require a company’s provision of information that would not necessarily be included in the standard reports required by SEC regulations.  This raises many of same questions that were addressed in the PAIS/Amazon Forum six years ago concerning what is reasonable to request and what is fair to provide, but in a context of information technology developments that are significantly expanding what can be reasonably produced.  The differences among experts about what information is considered relevant also requires attention to the difference between (a) what should be required by regulators in standardized reporting and (b) what processes should be established to encourage vital competition among investment professionals seeking better evaluations.