Press one for proxy

Shifts in proxy voting methods and advances in e-communications are seeing issuers and shareholders alike struggle under the weight of evolving processes and new regulations. Right now, the paranoia that technology could drastically decrease the amount of human interaction in shareholder relations no longer seems like such an Asimovian concept. And the changes to voting practices that are currently igniting a lot of conversational furor are also serving to distance shareholders from their ability to choose.

According to president of Shareholder Services Association (SSA), James Alden, who is also the director for shareholder services at Walt Disney, and SSA director Karl Wagner, who is the assistant director for Merck, notice and access and the NYSE’s proposed elimination of the broker vote in 2008 are fodder for some of the most heated debates among corporate secretaries and governance professionals.

Whatever you say

The NYSE’s Proxy Working Group, set up in 2005 to review the proxy voting process, has made several efforts at leniency with regard to eliminating the broker vote in director elections. First, they extended the implementation date to January 2008. More recently, after a mutual fund outcry, the group revised the proposal to exempt companies registered as investment companies from complying. But will that be enough? Many are still concerned about the impact the vote will have on the multitude of companies still obligated to abide by the rule.

In lieu of the impending shift, several alternatives are being considered. Foremost of these is client directed voting, proposed by secretary and corporate governance officer of American Express Company, Stephen Norman. This concept would allow shareholders to inform the broker of their preferences, at which point the broker would vote according to that information. This process would be determined at the time the original agreement between broker and shareholder is signed, wherein shareholders would select one of the following options: voting with management, against management, abstaining, aligning views with the broker or proportionally with other shareholders affiliated with the same brokerage firm, which is also the default.

Norman thinks the process would not only make things easier for brokers and shareholders, but serve as a boon to issuers. For the most part, this alternative that would ‘replace the broker non-vote’ sounds good to Alden: ‘It’s a trade-off to satisfy that we are intelligent people even though we don’t vote.’

‘With client directed voting, you still have the same issue,’ Wagner counters. ‘What someone makes as a preference today may not be what’s important three years from now. But once it’s in place, the shareholders aren’t likely to come back and say, I have to remember to change what my default is.’

In light of the difficult steps needed to simply change one’s mind, Alden concedes that client directed voting is good, but only up to a point. Problems arise when there’s a ‘particular issue with a board member,’ he says. 

Still, there are other options competing with client directed voting. ‘You’ve got a lot of brokerage firms who are now doing proportional voting, so you’re moving in that direction,’ says Wagner. ‘Proportional voting can be a challenge,’ adds Alden, ‘Let’s say you have an issue within your own employee plan, or you have employees who want to vote, we have proportional voting [at Disney]. If you’ve got half of those people that are disinterested and the other half are passionate, once they register their vote, we have the people that are not part of that process yet voting proportionally the same way. So it kind of skews things.’

For companies, the important thing is that votes come in, particularly from institutional shareholders. ‘Basically you’re out there to get your big institutions to vote,’ says Alden.

Rules of persuasion

Shareholder participation is also called into question with the SEC’s decision to mandate notice and access, or e-proxy. The great hope of electronic distribution of the proxy is that increased use of technology will result in a reduction in costs. Broadridge, the financial communications service provider that will be primarily responsible for the distribution, strongly endorses this SEC ruling. But some fear the company has an unfair advantage and is monopolizing the industry.

At a recent SSA luncheon, David Smith, president of the Society of Corporate Secretaries and Governance Professionals, denounced companies’ growing power: ‘I find it extraordinary that regulators allowed Broadridge to set their own fees.’ Wagner concurs. ‘They get to set their own prices,’ he says, adding that given the projected requests for hard copies, ‘When it’s all said and done, we’re not sure we’re going to save any money.’

Since notice and access has only been tested on small companies, and few large companies have taken up the option this year, many are waiting to see how the large-cap companies, and their shareholders, respond to the technological turn. Manager of shareholder services for Procter & Gamble, Jay Ernst, is one such skeptic. This year, Procter & Gamble will not adopt notice and access, citing the unknowns involving projected hard copy requests, costs and shareholder perception. After conducting an informal phone survey, Ernst says the company determined not to implement notice and access at this time.

Navigating the unknown

Senior vice president for DF King, Richard Grubaugh, thinks the new method could even give rise to shareholder activism. Others are hesitant to believe new methods will incite rebellions, but a growing number believe shareholder angst will be inevitable.

For companies constantly dealing with new regulations, technological advances are burdensome, but not surprising. Investors, however, are blindsided by these revised processes, and that can be disconcerting. ‘The problem is that while we as issuers are battling back and forth about whether we should do this or not, the investors have no idea about the rule changes so they get the end result,’ says Wagner. ‘Some of the people who own stock are not going to get anything anymore, and we’re making a guess as to whether we think that that matters or how.’

He thinks investors would better understand the benefits of the changes if they understood the purpose behind them: ‘I thought early on there was going to be some sort of investor education, so the investor would understand.’ Without that kind of education, he says, ‘you get the investors saying: Why are you disenfranchising me, and why should I even bother voting?’

There’s also the lure of playing hard to get, confides Alden, who says people will want hard copies just because they have been taken away.

This particular transition could be hard on investors given the lack of human guidance. Alden scoffs at the Broadridge fulfillment process, an automated phone system that will have shareholders key in numbers to request proxy materials or annual reports. ‘I don’t know how you could run a fulfillment service without listening to somebody,’ he says. It’s hard enough to find the right person to tell shareholders how to navigate this complicated strata, Wagner adds. ‘The reality is, the brokers don’t want to do these mailings anymore,’ he says. ‘They’ve hired a third party to take care of it, and the third party’s not connected to the investor, it’s not really connected to us as an issuer either.’

Invisible future

There is fear of the unknown. ‘Anybody who does [notice and access] cold turkey right now is taking a huge gamble,’ says Alden. To avoid unnecessary risk Disney will not implement the e-proxy service this year. ‘Even the rule states they’re projecting 19 percent take-up on people requesting hard copy,’ Alden says, noting, ‘Broadridge will tell you 3 to 5 percent.’ Those numbers are garnered from small annual meetings, he continues, reinforcing his decision to wait for more big meetings to see if notice and access actually works. He also sees the rule as being potentially unfair to shareholders, divvying them up in a way that goes against the grain of fair disclosure.

Wagner says Merck won’t be implementing notice and access this year either. But once the process gets underway, both he and Alden agree that retail investors will be more likely to opt in as institutional investors are already doing everything electronically anyway.

For the moment, we can be assured of shareholder participation, both with respect to how they will be voting and how they receive their information. But that situation is about to undergo a major and very real change, and already thought leaders are considering other options. ‘I think the right way to solve all this is to encourage electronic delivery to get more people engaged with regular e-delivery, so they get their blast email, view the material and go and vote,’ posits Alden.

In spite of the chaos, some do see an upside. ‘If there’s an opportunity, I’m going to take the opportunity that’s going to be most beneficial to us from a cost standpoint,’ Wagner jokes. The trick is, making sure those goals align with shareholders’. And without the reasoning behind these latest shifts, Wagner says from the shareholders’ perspective, ‘The question will be: Why are you doing this?’