Proxy fulfillment: a new world of choice

Antiquated’, ‘unfair’ and ‘dysfunctional’ are all terms that are frequently bandied about to describe America’s proxy distribution system. The chief complaint is that brokers are responsible for hiring a firm to distribute proxy materials and other shareholder communications to beneficial holders, and then the issuers foot the bill. On top of that, one outfit – Broadridge Financial Solutions (formerly ADP) – has a near monopoly on distribution and fulfillment services.

The exact percentage of the beneficial shareholder market Broadridge controls is unknown. Chuck Callan, senior vice president of regulatory affairs at Broadridge, wouldn’t comment beyond saying his company serves the ‘lion’s share of the market.’ Meanwhile, Arthur Rosenzweig, president of Manhattan-based Mediant Communications, a successful new entrant into the proxy fulfillment services market, notes that there are currently more than 90 million beneficial accounts up for grabs and estimates that anywhere from 95 percent to 98 percent of them are served by Broadridge.

‘It’s the brokers’ choice who does the distribution because they control the data necessary to do shareholder communications,’ explains Diana Bourke, CEO and president of Inveshare (formerly Swingvote) in Atlanta, Georgia. ‘But it’s the issuer that is responsible for paying the fees for corporate actions and proxy delivery. It’s one of the most unique business models you’ll ever see.’
Bridget Hughes, director of products and services at Bowne, which has partnered with Mediant in the launch of its proxy services, puts it this way: ‘The issuer doesn’t have a choice in who it uses, but it has to pay the rates Broadridge has agreed with the banks and brokers.’

Lack of choice and monopoly situations are not concepts with which Americans and their companies are usually comfortable. It is often considered that a lack of competition results in non-dynamic pricing and disincentive for innovation. Potential competitors also complain about unfair barriers to entry. Competitors aren’t the only ones demanding change, however. The Shareholder Communications Coalition, an advocacy organization, is pushing to reform the current proxy system, leveling the same complaints.

Critics have long-predicted that the times, they are a’ changing for proxy distribution. Yet, until recently, no real change has materialized. The present moment, many argue, is different. Notice and access has made electronic distribution a reality, and the number of those opting for e-delivery is rising. Between July 1, 2008, and February 28, 2009, 11 percent of all shareowner distributions occurred through the notice-only model, up from 8 percent during the same period a year ago, says Callan.

Opening up the market
Now that the proxy distribution system relies less heavily on paper distribution – and the expensive infrastructure associated with print and postage – the barriers for new entrants are lower, observes Hughes. As with any natural monopoly, however, the highest hurdle is often securing the first contract.

Participants have attempted to get into the space over the years but none gained much traction. In November 2008, Mediant broke the barrier, announcing its relationship with Legent Clearing, an Omaha, Nebraska-based clearing broker with 85 correspondent brokers, all of whom use Mediant for proxy delivery to beneficial shareholders. Meanwhile, Inveshare recently signed its first client, an online broker whose name it will reveal within the next few months after implementation has been completed, according to Bourke.

For years, issuers and other critics of the proxy distribution system have pinned their hopes on the SEC either regulating Broadridge or paving the way for others to compete in the market. This has yet to happen. ‘Despite pushing from the issuer community, the SEC has largely declined to regulate Broadridge in any sense,’ says Geoff Loftus, vice president of the Society of Corporate Secretaries and Governance Professionals. Given that regulatory action seems unlikely, the catalyst for change may be the competitors themselves.

A base of familiarity
Founded in 2002, Mediant currently works with hundreds of issuers to deliver communications to registered shareholders, says Rosenzweig. In its proxy distribution for beneficial shareholders, Rosenzweig emphasizes that the broker’s branding and message are paramount. ‘When clients of all 85 of Legent’s correspondent brokers get shareholder communications from us, we’re in the background,’ he notes. ‘They see the colors and the message of the correspondent broker.’ By contrast, many have faulted Broadridge for sending out standardized communications in which the identity of both the broker and issuer are easily lost.

The benefits of competition – in addition to the natural change that was beginning to emerge already – are felt by all players in the market. The single most significant change is technological advances that make the fulfillment process faster, cheaper and more efficient. Technology is allowing revolutionary change by bringing down the cost of shareholder communications to the benefit of brokers, issuers and, ultimately, shareholders, notes Rosenzweig. He also points out that Mediant’s network system promotes transparency because issuers can verify that large blocks of shares have been voted, while shareholders know their votes have been tabulated. 

Ray Maratea, co-president of Legent, spoke with Mediant for more than a year before deciding to leave Broadridge. Legent’s decision to use Mediant was based on ‘the economics, the technology and the positive impact to our clients,’ Maratea says, adding that ‘the implementation went rather seamlessly.’

Inveshare is taking a slightly different approach and specifically targeting online brokers because they have ‘the perfect scenario for electronic delivery,’ says Bourke. Inveshare’s first client is an online broker, adds Bourke, and ‘our solution has been to take what has been predominantly paper delivery to almost complete electronic delivery after the implementation.’

Peter Friz, executive vice president of sales and market development for Inveshare, believes his company is unique in its focus ‘on online education and content and improving the overall experience for the online investor.’ Friz emphasizes that Inveshare can improve existing communication channels ‘by adding more conversation around important corporate events, such as proxies.’

Breaking into the market
Even though Mediant and Inveshare have each gotten a foot in the door, Loftus remains skeptical. ‘The situation is ripe for competition, but at the moment Broadridge is riding a gigantic winning streak,’ he says. ‘Until someone gets in there and shows he or she can compete, I’m not going to say Broadridge has a realistic competitor.’

One reason why competitors are having trouble breaking in is Broadridge’s track record. ‘Broadridge has done a truly phenomenal job and it deserves credit for putting together a system that has allowed shareholder meetings and voting to take place for a period of well over 10 years with very few snafus,’ explains Rosenzweig. ‘Information has been distributed and votes have gotten in, and this isn’t an easy task.’

That said, Broadridge also owes much of its success to its near-monopoly status, which it inherited from predecessor ADP. Hughes points out that most brokers view proxy distribution as ‘a piece of a bigger pie’ and that Broadridge has pushed bundled contracts that also provide for the distribution of mutual fund prospectuses and communications. In addition, Broadridge has gotten clients to sign long-term contracts, says Rosenzweig, noting that it can take several years before a competitor can wrest away the business.

While there is little doubt the emergence of new players is encouraging change, it is worth noting that several important advancements have taken place in the past few years, driven by Broadridge before new entrants made their appearance. With an intense focus on cost cutting, saving money is high on every broker’s and issuer’s wish list. Broadridge has compiled statistics to show how the adoption of new processes such as notice and access and other technologies are saving issuers money.

From July 1, 2007 through March 31, 2009, issuers have saved more than $260 million in connection with beneficial shareholders receiving materials electronically, says Callan, noting that this number is based on Broadridge’s processing statistics and the National Institute of Investor Relations’ (NIRI) estimates of the cost of printed materials.

A lack of clarity
That said, fees are clearly the Achilles’ heel in Broadridge’s model. Loftus acknowledges that Broadridge has produced ‘a lot of statistics’ about cost savings, but the problem remains that, without effective competition, ‘we have no way of really knowing’ whether the fees are fair. Broadridge’s fees, he says, are ‘the thing our members go craziest about.’

Rosenzweig believes the current fee structure, which is set by the NYSE after reviewing information from Broadridge, is not the best answer. Inveshare agrees. So do many issuers. How Broadridge sets fees is a mystery to issuers and even many brokers, says Bourke. ‘To say it’s a black box is oversimplifying,’ adds Friz, who notes that no one knows precisely what brokers are being charged and what, if anything, they’re retaining as revenue for delivering communications to beneficial shareholders.

Rather than confront the regulators, Mediant has chosen to ‘unilaterally lower the basic proxy fees for all beneficial shareholders.’ For listed companies whose beneficial shareholders receive materials through Legent’s brokers, the basic processing fee has gone from 40 cents to 30 cents per beneficial account, says Rosenzweig.

Inveshare is convinced it can reduce costs to issuers most dramatically by promoting electronic delivery. ‘We’re able to drive significant levels of electronic delivery, which, by definition, saves the issuer money in postage, print and handling of paper materials,’ notes Friz.

Beyond fees, Broadridge, Inveshare and Mediant can also help remove impediments to e-delivery by, for instance, helping increase disappointing levels of retail participation. Typically, says Callan, around 20 percent of individual investors vote their proxies but, with notice and access, this has dropped to less than 5 percent.

Broadridge is working with issuers and brokers to find a solution and is exploring the possibility of individual shareholders giving ‘standing orders’ for how they would like to vote a particular issue, much as institutions do today. Were a broker to provide education around proxy voting and allow ‘standing instructions’ for common proxy initiatives, Callan believes retail participation would rise.

Moving ahead
No question, technology is remaking the proxy distribution space, and Broadridge is at the forefront of that change. On May 20, Broadridge broke important new ground when it helped Intel hold the first-ever virtual shareholder meeting, where shareholders could log in, ask questions and cast votes in real time. ‘This is the first time shareholders have had the chance to vote at the meeting online,’ says Callan.

With the success of Intel’s meeting, it is likely many other issuers will examine the possibility in the future, and possibly seek Broadridge’s help. The ability to conduct real-time, accurate and efficient voting will greatly benefit not just shareholders but also the issuers. This development, initiated by Broadridge, could dramatically alter the way annual meetings are conducted and how the shareholder vote is managed.

With changes coming thick and fast on the technological and regulatory fronts, the notion that there will also be changes in how proxies and other shareholder communications are delivered to beneficial shareholders seems increasingly clear. For now, issuers and brokers are avidly watching Broadridge’s latest competitors and the developments that competition is likely to bring.