US calls for more access to investor information
No matter how brilliantly IROs refine their techniques, they keep bumping up against brick walls. Communicating directly with shareholders is a perennial barrier. Efforts to ID investors can resemble a game of Battleship, where information is discovered after rounds of guesswork.
No wonder there are moves afoot to unmask beneficial shareowners who own their stock in ‘street-name’ through a nominee broker. In April 2004 the Business Roundtable petitioned the SEC to make it easier to have direct communication, particularly with objecting beneficial owners (OBOs) but also with non-objecting beneficial shareholders (NOBOs). Recently, the NYSE Proxy Working Group asked to revisit the issue. A popular suggestion: Investors be re-solicited to make sure they understand their NOBO/OBO status, a distinction that went into effect in 1986.
While NOBO/OBO system reform has plenty of backers, there is no sign that it will be overhauled. SEC spokesman John Heine says the ‘matter is still pending.’
OBOs are ‘not a front burner issue with the SEC,’ says Linda Kelleher, executive vice president at the National Investor Relations Institute (Niri). She continues: ‘[SEC] Chairman Cox has a few initiatives that he’s very anxious to shepherd along as far as he can before a change in administration. And I don’t think NOBOs/OBOs are critical to him.’ Someone else closely connected to the issue put it more bluntly: ‘Nothing’s going to happen until after the next election.’
The veil of anonymity ‘protecting’ investors is galling to US companies given companies abroad enjoy more shareholder information (see sidebar). Kelleher says: ‘It’s a constant frustration to our members that they don’t have a working knowledge of who their investors are,’ adding electronic markets and hedge fund activism exacerbate the need for this information.
New realities
A surprising finding of the NYSE Proxy Working Group, according to David Berger, partner at Wilson Sonsini Goodrich & Rosati and the group’s counsel, is a large number of shareholders don’t understand the NOBO/OBO distinction.
An April 2006 study conducted for the NYSE found only 20 percent of OBOs recall being asked if they want their contact information provided to the companies whose stock they purchase. Of those who remember, 79 percent provided contact information. Overall, 73 percent of investors surveyed provided contact information or would have had they been asked.
These findings don’t jibe with current OBO numbers. Chuck Callan, senior vice president of regulatory affairs for Broadridge, says approximately 60 percent of account holders are currently NOBOs, so their names are available to any company that wants to purchase its list from Broadridge. That said, Callan notes only one third of shares are held by NOBOs and two thirds by OBOs, the disparity due to many OBO investors being large institutions without permission to be identified.
Kurt Stocker, chairman of the NYSE’s Individual Investor Advisory Committee, agrees there’s a need for investor education: ‘The research is very clear that the majority of OBOs don’t know they’re OBOs, and when given more information, they don’t want to be OBOs.’ In the absence of a preference, Stocker argues the default should be NOBO, not OBO.
Changes to the proxy landscape are making direct communication a cause célèbre. The repeal of NYSE Rule 452 [removing the broker-discretionary vote for director elections] will boost incentive for individual investors to vote as they will now have more power vis-à-vis board decisions. If they don’t, then institutions might have greater say in the post-452 world.
‘What the issuers are saying,’ explains Berger, ‘is that if we are going to remove broker discretionary voting, you have to allow issuers to have greater access to their shareholders through removal of the NOBO/OBO distinction.’
Charles Rossi, executive vice president at Computershare and Stock Transfer Association president, raises a related point. The elimination of Rule 452 means companies may need to approach shareholders frequently to generate the necessary vote in director elections. Given that proxy communications go through an intermediary, Broadridge, whose rates aren’t subject to competition, more communication could get expensive.
Rossi and Paul Conn, Computershare’s president, global capital markets, would like to dismiss the NOBO/OBO terminology, which they believe adds to the confusion of an already arcane debate.
The privacy concern
The strongest backers of the NOBO/OBO system are brokers, who arguably exercise a stronger claim on their clients by controlling the communication flow. Most brokers, however, say their interest is in protecting their clients’ privacy. ‘The brokers fervently argue that their clients do not want to be bothered by continual mailings and phone calls from companies soliciting during proxy season,’ says Berger. Stocker notes that companies don’t deluge direct investors with calls and insists this won’t happen if direct communication were permitted.
An offshoot of the privacy argument gives some direct communication advocates pause, worried opening shareholder rosters might allow activists and hedge funds to communicate directly with their investors.
The potential risks of making shareholder lists too public have prompted some to advocate gradual change. Most aren’t arguing against shareholder anonymity. But because public companies incur costs communicating through brokers and Broadridge, some suggest shareholders retain OBO status at a small price, which Rossi compares to paying for an unlisted phone number.
Whatever the solution, NOBO/OBO reform proponents wish it garnered more attention. ‘I can’t tell you whether the NOBO/OBO question will be revisited,’ concludes Stocker. ‘But I know that it should be.’
