Shareholder empowerment is making boards more accountable, with the SEC's new website for small-lot shareholders likely to increase the trend
‘In a democratic world, as in a democratic nation, power must be linked with responsibility.’ While Franklin D Roosevelt was not referring to the corporate boardroom when he wrote this famous line, the theme is nonetheless equally applicable to the current reality of director elections.
The past 10 years has witnessed an irrepressible push toward empowering owners of public companies and making boards of those companies more directly answerable to the owners. This push toward a more democratic business environment is having a massive impact on the way boards – and their companies – are being managed.
Most shareholders, and many boards, are happy with the progress that has been made, but there are some important problems. The debate surrounding director elections has focused almost entirely on shareholders’ rights; there has been little discussion of shareholder responsibility. These days, however, investors have considerably more power and, as such, need to exercise it responsibly.
Voting trends
While shareholders have long had the power to vote for directors of the companies in which they invest, many have chosen not to, either due to a lack of knowledge and understanding of the process or, more likely, because of general apathy. A series of regulatory changes, most notably notice and access and Rule 452, has resulted in a significant drop-off in voter participation among small-lot shareholders, usually retail holders.
Companies have expressed concern about this lack of activity among retail shareholders and fear it may lead to problems achieving quorum and/or difficulty in electing directors. In order to combat the problem, many firms are taking steps to educate shareholders on the importance of voting, while simultaneously trying to convince them to support the management slate.
Reaching out to retail shareholders can be a remarkably difficult process, however, as companies are often restricted from identifying the owners of their stock. But now issuers can count on a new ally in their director education efforts: the SEC. During late 2009 the commission launched Investor.gov, a new section of its website specifically designed to serve the needs of small-lot shareholders. And in January this year the SEC enticed Rich Ferlauto, well-known shareholder activist and former director of corporate governance and pension investment at the American Federation of State County and Municipal Employees, to leave the influential union and join the commission’s Office of Investor Education and Advocacy (OIEA), which is responsible for the new website.
‘The most important thing at the moment is to get out the proxy vote,’ explains Ferlauto. ‘The division is organizing an outreach campaign about the new post-452 environment, in particular for retail investors.’
In addition to creating an online tool and web-based materials to educate investors and guide them through the voting process, the OIEA formulates policies that help the SEC serve investors more effectively.
One of the main focuses of the Investor.gov website and the materials it is putting out is the notice and access system for distribution of proxy materials. There is far more than that on the site, however. As Corporate Secretary went to press, the OIEA had 161 sub-sections on its site specifically for the education of investors, with topics ranging from XBRL to evaluating a broker/dealer and avoiding getting caught in a Ponzi scheme.
Lori Schock, director of the OIEA, explains on the department’s website that the division ‘has direct contact with tens of thousands of individual investors each year, hearing their needs, answering their questions and helping to solve their problems.’ But the SEC is faced with very similar challenges to corporations in that it is not always able to identify specific shareholders. That, according to Schock, is exactly why the commission developed the website.
Traffic movements
Having a site and populating it with information does not mean investors will find it, however. Shareholders aren’t just sitting around cruising the SEC website, waiting for new services to crop up. That is why Schock, Ferlauto and other leaders of the OIEA are meeting with pension and mutual fund managers, professional organizations and the broader issuer community to get the message out.
Schock says companies are very supportive of the OIEA’s work and are happy to provide information on corporate websites, IR services and other tools to direct investors to the site. It can, in theory, take away some of the expense and stress of a company undertaking its own investor education campaign.
The SEC is taking the task seriously and devoting considerable funding to helping Schock and her team inform investors. The OIEA has 81 employees and, according to Schock, ‘there is a commitment to grow the team during 2010.’ Competition for funding at the notoriously under-resourced SEC is intense and this is seen as proof the commission is serious about investor education and advocacy.
In addition to a wealth of static documentation and constantly updated investor alerts and tools, Investor.gov allows shareholders to post questions to the SEC. There is also a facility to make complaints or provide tips where negligent/fraudulent behavior is suspected.
Not all investors are the same
The importance of this particular form of shareholder education was highlighted during the Activist Investor Conference in New York in January, where a significant number of investors – both small and large – came together to discuss the latest regulations and share techniques for achieving greater representation at board level. It was made abundantly clear that many investors, including those at large pension funds with billions of dollars under management, are concerned about the motives of some activist shareholders.
Hedge funds and others with short-term speculative interests have very different needs – in fact, usually contrary needs – from long-term value investors. One participant from a large New York investment bank explained that it is important for all shareholders, retail and institutional alike, to bear in mind that just because they may be considering voting against management, that is no reason to support proposals or nominees from any shareholder group that may want to strip value and sell assets. This could make things far worse for them than supporting underperforming management.
As Ferlauto explains, it is also important to make everyone understand the importance of voting and the need to understand the possible motives of those involved in the process. By not voting, shareholders can allow special interest groups to gain influence.
If democracy at public companies is going to work, everyone needs to take the process seriously and understand that voting is not just a right; it is also a responsibility. All shareholders have a responsibility to inform themselves. Failure to do so could lead to serious loss of efficiency, and ultimately damage shareholder value.
