Accessing the future

Whether you view the SEC’s new ‘notice and access’ rule as terrific or just one more confusing possibility amidst a rapidly-changing proxy landscape varies by company. It’s true that notice and access offers public companies the possibility of saving large sums by potentially eliminating the need for mailing out thousands of bulky packages of annual reports and proxy materials, most of which wind up in the trash. But embracing e-delivery could mean weakening your ties with your retail shareholders and depressing voter turnout at a time when garnering consensus around corporate governance issues is paramount.

The SEC’s new rule S7-10-05 allows public companies to mail shareholders a card informing them how they can access proxy materials online. 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 most important issue. Were this universally adopted (and the SEC will require large issuers to give investors the option of online communications beginning next proxy season), companies could save $150 million to $200 million a year in print and postage, estimates Lyell Dampeer, president of investor communications solutions, US, at Broadridge Financial Solutions, formerly ADP’s Brokerage Services Group.

Because companies must send a 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 that there will be early adopters, primarily in the high-tech arena, he notes that most companies ‘haven’t given it a lot of hard thought yet.’

Dollars and cents

To calculate cost-savings, corporate secretaries need to consider how many investors will opt for paper. While estimates range from 2 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 risks paying for a second print run, cautions Peter Friz, vice president of global voting and transaction services for Institutional Shareholder Services. Friz also points out that companies must distribute paper copies of the annual report for a year following the annual meeting.

Given that privacy concerns dictate that companies send investors proxy materials through a recognized fulfillment specialist such as Broadridge, the rates for these fulfillment services also matter, says Friz. While the SEC and the NYSE set rates for this service in the past, Broadridge will now be making the determination itself, but no final decisions had been made as of early July.

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, but no one knows how large this fee might be. As a result, Berger says that it’s not clear how expensive distributing individual packages will be under this new system.

Calculating print runs

Whether a company saves money through ‘notice and access’ depends in part on how accurately it calculates its print run. Friz acknowledges that there’s going to be some real ‘guesswork’ involved. ‘If you print, say, 100,000 copies, and you need something less than 100,000 copies, you’ll have saved substantial money,’ he notes, cautioning that second print runs are expensive.

Joe Lindfeldt, executive vice president of corporate development for financial printer CGI North America, advises corporate secretaries to know last year’s print run and to get a current tally of shareholders by contacting Broadridge and your transfer agent. That said, ‘the first year is going to be a guessing game,’ he acknowledges. Because the initial set-up costs for offset printing are so high, Lindfeldt thinks that many companies will print the full run in the first year, even if that ultimately means throwing out extras.

Apart from analyzing print runs from previous years it is also important to get a feel for what shareholders want this year and how they are likely to respond to notice and access. There is an assumption that most retail holders, given the correct warning and education, will be happy to vote online. Working with a proxy solicitation firm and pushing them to get accurate figures regarding shareholders’ likely reactions is crucial.

Richard Grubaugh, senior vice president at D F King & Company, points out that the types of brokerage firms that your shareholders use can be some indication of their technological savvy (and the likelihood that they’ll be satisfied with online delivery). ‘Obviously,’ he says, ‘if you see online brokerage firms you have a shareholder base that has online access and is familiar with a computer.’

Some companies are suggesting digital on-demand printing as a possible solution to the dilemma of calculating print runs. Instead of deciding on an absolute number of copies to print, you simply run off additional copies upon request.

It’s not so simple, says Scott Greenberg, president of Curran & Connors, an annual report design firm based in Hauppauge, NY. Firstly, the SEC is demanding that paper copies be sent 72 hours after a shareholder first requests them, giving companies very little time to comply. Secondly, digital on-demand limits creativity within the annual report. It can’t yet achieve the same quality graphics of traditional print methods, says Greenberg. He points out that techniques like dye-cutting and even some off-size solutions are outside the scope of digital on-demand.

Beyond determining print runs, corporate secretaries face another practical dilemma. Rob Folinus, vice president at Mellon Investor Services, describes the new timetable for e-proxies as ‘the biggest cultural shift’ public companies face. Ensuring that all materials are completed, approved and delivered to a processing agent 40 days before the annual meeting is no mean feat.

Voter turnout

Another concern is voter apathy. Gary Purnhagen, vice president of strategic planning at Merrill Corporation, says that many companies are fretting about the response from shareholders that they’ll get in an electronic-delivery world.

Carl Hagberg, chairman of shareholder relations firm Carl Hagberg & Associates, points out that companies with contentious issues on the ballot can’t afford to try notice and access 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 continues: ‘The angry people always vote. The satisfied or the indifferent, almost by definition, they’re just not voting as much.’

Grubaugh says, ‘If a company implements notice and access, it’s hard to imagine how that will increase their voter participation.’ But voter turnout is already on the wane, he adds, ‘retail participation is low now anyway even with mailing out a proxy statement and a color annual report. In many cases we see less than 30 percent of the retail shareholders participating.’

He also urges corporate secretaries to look at  notice and access within the context of other changes in the proxy landscape. Should the broker discretionary vote go away – as it appears that it might – the impact of notice and access would intensify because every vote would become even more meaningful than it already is. Under that scenario, notice and access really could dovetail into a lethal combination for the largest companies, says Grubaugh.

Lindfeldt agrees: ‘When companies start having a hard time achieving quorum, that’s when the game changes completely.’
In the end, the decision to adopt notice and access may come down to a company’s philosophical stance toward retail investors. ‘Will a $50 billion company cut off its ties with retail shareholders to save $1 million?’ asks Grubaugh. ‘Some will, but many cherish their relationship with their retail holders and they’re not going to do anything that’s going to cut those ties.’

A hybrid approach?

Dampeer thinks a hybrid approach to e-distribution is very likely, and that the size of investors’ holdings will be a key determinant in whether they receive paper mailings. He also believes some companies will mail traditional packages to investors who sent in paper proxies in the past, or to local investors who might attend the annual meeting.

Notice and access will inevitably bring with it other expected and unexpected changes. Because e-proxies lower the costs for dissidents who seek communication with other shareholders, management may feel the pressure to cut deals with activist groups. ‘This may be just enough grease to get the wheels turning when management and shareholders are engaged in discussions,’ says 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.’

E-delivery might also prove a tremendous boon to XBRL, the formatting language that makes financial documents taggable. By requiring all companies to put their annual reports and proxies on the web, the SEC may swell the ranks of public companies that see the advantages of embracing XBRL, says Purnhagen.

Finally, Berger points out that notice and access is just one of several initiatives that might forever change how public companies and shareholders interact. Others include a revisiting of plurality voting, an opening of shareholder rosters to public companies and the demise of the broker vote. ‘The SEC’s looking at a variety of things related to shareholder voting and communications, and there’s a real recognition of the integrated nature of the current system,’ concludes Berger. ‘One of the questions is whether notice and access is just the first step of a longer process.’