E-delivery a half measure

Getting out the vote has a new meaning in the world of corporate proxies. The decision by the SEC in December 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. And from there, this simple matter just gets more and more complex.

The largest chunk of shares voted comes from institutions, of course, since 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 the ‘mom and pop’ holders. This concern is part of the SEC 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.

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 receiving a hard copy. ‘In fact, the idea of having hard copy as an always 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,’ Endean goes on. ‘Plus, they have included the idea of making [electronic distribution] mandatory and that will necessarily trigger a whole new comment period.’

Stay tuned
John Heine, a spokesman for the SEC, confirms the process may be drawn out. The e-proxy action was one of six taken on December 13, all of which need to be processed, he notes. And the rule change isn’t to take effect before July 1.

The agency also said there will be a proposal to make the procedures permanent. Press reports indicate that can 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 says. In addition to other matters that may take the commission’s attention away, a comment process will be triggered if e-proxies are to become mandatory, raising new issues that the commission may 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 SEC gets around to seeking a permanent requirement is unknown. There continue to be those with issues about electronic voting. At the Leadership Conference for Civil Rights, a group representing around 200 civil rights organizations in the US, Nancy Zirkin, vice president, said the group’s members are still concerned for 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,’ she said, adding that ‘only 32 percent of people over age 65 have internet access.’

The American Association for Retired People (AARP) is not happy either. ‘We want paper to be the default,’ said president Chris Hansen two days after the SEC’s announcement. ‘The decision did not do that.’ AARP members, some 37 million strong, tend to be more affluent and computer savvy. 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. The worry of AARP members is not just about voting rights . ‘They want to be informed, even if they don’t vote,’ Hansen says.

Lots of support, but…
Still, nearly everyone says they support SEC chairman Christopher Cox’s efforts to modernize shareholder communications. Roger Byrom, CEO of annual report producer Addison, says that there are lots of commendable aspects to going electronic: ‘It saves a step given that all these documents are in software already. It produces instantaneous delivery and it’s environmentally sound.’ But all those things, even when coupled to the SEC’s rule-making, will not move the mountain that is retail shareholder reluctance.

Something has to be done to get the vote in. The NYSE has proposed to the SEC 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. If you are a small or medium size company and rely on the broker vote, and you’re told we’re scaling back on the broker vote, but then you are also told there is a chance that we may have lower participation by investors, you are in a real fix that can only be solved by paying proxy solicitors to round up these votes,’ Endean asserts.

Conn believes retail voting is set to rise. He says the fact that people will get electronic instructions along with the documents means it is likely they will act using electronic means. Just how much of a boost or when it will become apparent is not yet clear, but Conn says it will come. Inasmuch as shareholders will be getting materials electronically, the theory goes they will be more likely to act electronically by voting either on a connected internet facility or by calling a telephone number where their vote will be tallied electronically.

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. But this won’t just automatically come to pass.

The SEC’s action only amounts to a first step – ‘an appropriate, but very simplistic, first step,’ in the words of Rich Ferlauto, director of pension and benefit policy at one of the most active organizations in corporate governance, the American Federation of State, County and Municipal Employees (AFSCME).

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 says. They’ll have a significant problem because electronic distribution is not comprehensive enough to get to all shareholders, he says.

It’s not just a question of internet access, he adds: ‘It is a question of equipment. Very few people have the equipment to print out large documents at home – or 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 decision-making in a heavy calendar during proxy season and do 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.’