With the advent of e-proxies, IROs suddenly have the chance to save large sums by no longer mailing out thousands of bulky packages of annual reports and proxy materials, most of which wind up in the trash. Are they rejoicing? Not yet. Many are concerned the SEC’s new ‘notice and access’ rule is fraught with far too many unknowns.
The SEC’s Rule S7-10-05 allows public companies to mail shareholders a card informing them where and how they can access proxy materials on the web. Although any investor who requests printed documents must receive them free of charge, the onus is now on the investor to ask for paper, not on the company to provide it.
The extent of the cost savings is the biggest question mark. Were this universally mandated (and it looks like the SEC will require notice and access for large issuers beginning next proxy season), US companies could save a total of $150 mn to $200 mn a year in print and postage costs, estimates Lyell Dampeer, president of US investor communications solutions at Broadridge Financial Solutions (formerly ADP’s brokerage services group).
Some IROs also like the environmental angle: the SEC has quoted a non-profit estimate that e-proxies might prevent 100,000 tons of paper from winding up in landfills each year.
Because companies must send the notice card 40 days before the annual meeting, only companies with meeting dates on or after August 10 can test the new rule in 2007. Although Dampeer predicts there will be early adopters, primarily in the high-tech arena, he notes that most IROs ‘haven’t given it a lot of hard thought yet.’
Dollars and cents
To calculate cost savings, IROs need to consider how many investors will opt for paper. While estimates range anywhere from 2 percent to 19 percent, Dampeer anticipates that ‘a percentage in the low single digits’ will go this route. He notes that around 90 percent of today’s shares are voted electronically (most votes come from institutions, which overwhelmingly vote online).
Ranges are useful, but a company that guesses wrong and must foot the bill for a second print run might end up going over budget, cautions Peter Friz, vice president of global voting and transaction services at Institutional Shareholder Services. He also points out that companies must be prepared to distribute paper copies of the annual report for a year following the annual meeting.
Given that, for privacy reasons, companies send investors proxy materials through Broadridge, the rates for Broadridge’s services also matter, says Friz. While the SEC and the NYSE have set rates for this service in the past, Broadridge will be making the determination itself, but no final decisions had been made as of late May.
Here, too, the precise details make all the difference. David Berger, partner at Wilson Sonsini Goodrich & Rosati and legal counsel for the NYSE’s proxy working group, points out that Broadridge could charge a ‘suppression fee’ for any e-proxies sent, and that this fee is yet to be determined. As a result, he says it’s not clear how expensive distributing individual packages will be under this new system.
Mounting concerns
Rob Folinus, vice president at Mellon Investor Services, describes the new timetable for e-proxies as ‘the biggest cultural shift’ public companies face. Ensuring all materials are completed, approved and delivered to a processing agent 40 days before the annual meeting is no mean feat. ‘Most public companies go through rounds of discussion, revision and modification before they have their compliance materials done,’ Folinus says. ‘Sometimes that goes right up to the wire before the mail date.’
Another concern is voter apathy. Gary Purnhagen, vice president of strategic planning at Merrill Corporation, says many companies are fretting about the turnout they’ll get from retail shareholders in a purely electronic world.
Carl Hagberg, chairman of shareholder relations firm Carl T Hagberg & Associates, points out that companies with contentious issues on the ballot can’t afford to try e-delivery only to lose all-important votes. ‘If you find yourself under attack, I think you’ll probably be sending more paper than you ever did before,’ he warns.
Berger points out that notice and access is just one of several initiatives that might forever change the paradigm of how public companies and share-holders interact. Other potential changes include a revisiting of plurality voting, an opening of shareholder rosters to public companies, and the demise of the broker discretionary vote for electing directors.
‘The SEC’s looking at a variety of issues related to shareholder voting and communications,’ concludes Berger. ‘One of the questions is whether notice and access is just the first step of a longer process.’ Given the strategic importance of a glossy annual highlighting a company’s accomplishments, Purnhagen believes firms will continue to send out printed packets to their larger retail holders.
Dampeer agrees a hybrid approach to distribution is likely. The size of an investor’s holdings wouldn’t necessarily be the only deciding factor – he believes some companies will send traditional packages to investors who returned paper proxies in previous years, or to local investors who might conceivably attend the AGM.
E-delivery might also prove a tremendous boon to XBRL, the new formatting language that makes financial documents taggable and easier to manipulate for analysts and investors. By requiring all companies to put their annual reports and proxies on the web, the SEC might swell the ranks of public companies that already see the advantages of embracing XBRL, maintains Purnhagen.
Notice and access will bring other changes, too. Because e-proxies lower the costs for dissidents who want to communicate with other shareholders, management might suddenly feel some pressure to cut deals. ‘This may be just enough grease to get the wheels turning when management and shareholders engage in discussions,’ notes Friz. ‘The threat of a low-cost proxy contest may make management more willing to listen to shareholders and have a constructive dialogue rather than a public fight.’
