Getting out the vote has a new meaning in the world of corporate proxies. The decision by the SEC in December 2006 to okay electronic distribution of materials will help muster more votes from retail investors, according to some experts in the field. But there is another side to the story: a couple of groups that speak out for small investors are saying fewer people may vote as a result. The largest chunk of shares voted comes from institutions, of course, as they own the most stock. They have been quick to embrace electronic voting because it is cheaper and more efficient than collecting everything on paper. The December announcement, which should significantly reduce the mailing of paper documents, is expected to extend savings to issuers, especially the larger companies with millions of shareholders.
But the SEC has been very careful to consider what the impact of internet voting will be for all investors, especially mom and pop shareholders. This concern is part of the commission’s mandate, but has taken on more significance with the rise of the boomer generation as it enters retirement age with a keen focus on its money.
The problem is, when it comes to proxy materials and voting, no-one seems very sure whether the American public wants to go electronic or not. The final rule lets companies make electronic distribution of materials the standard while giving investors the right to opt in to receive a hard copy. ‘In fact, the idea of having hard copy as an ever-available feature wasn’t even in the first proposals from the SEC,’ notes Paul Conn, president of global markets at Computershare.
‘The situation is very much in flux,’ adds John Endean, president of the American Business Conference, which represents the interests of mid-cap and smaller companies. ‘Despite what the SEC has said, we are still many miles from having a workable operative rule. That’s true no matter what the SEC does. ‘I think there is going to be a great deal of careful consideration by commission staff about how this is going to work. Plus, the SEC has included the idea of making [electronic distribution] mandatory and that will necessarily trigger a whole new comment period.’
Stay tuned
John Heine, a spokesperson for the SEC, confirms that the process may be drawn out. The e-proxy action was one of six taken on December 13, 2006, all of which need to be processed, he points out. And the rule change isn’t likely to take effect before July 1 this year. The commission also says there will be a proposal to make the procedures permanent; press reports indicate this could happen as early as January 1, 2008.
Heine says there is no way to accurately predict a timetable. He gives as an example the fact that the SEC was quite concerned about regulating hedge funds in mid-2003 but, because of intervening matters on mutual funds, the commission didn’t get around to the topic for another year. ‘Many things can happen,’ Heine notes. In addition to other matters that might take away the SEC’s attention, a comment process will be triggered if e-proxies are to become mandatory, raising new issues that the commission might need to investigate.
The first comment period brought a large number of suggestions, enough to consume six pages in the SEC index on the topic. What may be raised when the commission gets around to seeking a permanent requirement is unknown.
There continue to be those with issues about electronic voting. At the Leadership Conference on Civil Rights, a group representing around 200 civil rights organizations in the US, Nancy Zirkin, vice president of the association, says the group’s members are still worried about the voting rights of the elderly and those who have no direct access to the internet. ‘We are concerned that the program could disadvantage and reduce shareholder participation,’ Zirkin notes, adding that ‘only 32 percent of people over 65 have internet access.’
The American Association for Retired People (AARP) is not happy, either. ‘We want paper to be the default,’ said Chris Hansen, group executive officer for state and national initiatives at AARP, two days after the SEC’s announcement. ‘The decision did not [dictate] that.’ AARP members, some 37 mn strong, tend to be more affluent and computersavvy. Nevertheless, a survey in mid-2005 showed 71 percent of respondents did not want to lose mailed proxies, even though most had internet access, Hansen reports.
Retail shareholders are notoriously lax when it comes to voting. But Hansen says they still want the information, and they want it in hard copy. ‘Retail shareholders want to be informed, even if they don’t vote,’ he explains.
Lots of support, but…
Still, nearly everyone voices support for SEC chairman Christopher Cox’s efforts to modernize shareholder communications. Roger Byrom, CEO of annual report producer Addison, says there are lots of commendable aspects to going electronic: ‘It saves a step given that all these documents are in [electronic format] already. It produces instantaneous delivery and it’s environmentally sound.’
But all those things, even when coupled with the SEC’s rulemaking, will not move the mountain that is retail shareholder reluctance. Something has to be done to get the vote in. The NYSE has proposed doing away with the broker vote, which currently makes up the voting quorum for director elections when beneficial shareholders don’t issue proxy instructions.
‘The NYSE is trying to get away from the broker vote,’ Endean says. ‘If you are a small or medium-sized company relying on the broker vote, and you’re told the broker vote is being scaled back, but then you are also told there is a chance there may be lower participation by investors, you are in a real fix that can only be solved by paying proxy solicitors to round up those votes.’
Conn believes retail voting is set to rise. He says the fact that people will get electronic instructions along with the documents makes it likely they will act using electronic means, by voting either on a connected internet facility or by calling a telephone number where their vote will be tallied electronically. Just how much of a boost or when it will become apparent is not yet clear, but Conn says it will come.
More activist campaigns?
There is another area in which early commentators may have been too quick to judge: activist participation in corporate governance. Delivering documents by mail is costly, sometimes up to $5 per item, which translates to millions of dollars for proxy campaigns against companies with big shareholder numbers. So the switch to less expensive electronic delivery would theoretically allow activists to engage in proxy solicitation more easily. This won’t happen automatically, however.
The SEC’s action amounts only to a first step – ‘an appropriate, but very simplistic, first step,’ according to Rich Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees (AFSCME), one of the most active organizations in corporate governance.
Among the issues is how activists will use electronic media to distribute their proposals. Could they just direct shareholders to larger amounts of information on the web, for instance? This issue, Ferlauto notes, wasn’t addressed at all.
Then there is the question of companies stepping up. ‘It is not clear to me how many companies would move to this because demand for paper will still be quite large,’ Ferlauto points out. He believes they will have a significant problem because electronic distribution is not comprehensive enough to get to all shareholders.
It’s not just an issue of internet access, either, Ferlauto adds: ‘It is a question of equipment. Very few people have the equipment to print out large documents at home – or would want to.’
Systems are in place to bring e-votes to all the necessary players. Institutional managers can view how a vote is going, keep tabs on issues-based votes across companies, coordinate their decisionmaking in a heavy calendar during proxy season and provide e-reports for clients and regulatory officials. Trust and custodial agents likewise see the flow with a clear audit trail so that company meeting rules are proven to be met, and voting at annual meetings is fast and accurate.
Meanwhile, the SEC and others are moving to modernize other aspects of communications between shareholders and companies, such as pushing the introduction of XBRL filings. But getting the retail side hooked up has a long way to go. ‘It’s a vision for the future,’ says Ferlauto, ‘but it is not the reality of how most individual investors use technology today.’
