SEEKING to improve board accountability to shareholders, one of the US Securities and Exchange Commission’s (SEC) leaders has called for the 18-month-old electronic proxy delivery rules to be improved or repealed.
Commissioner Luis Aguilar said at the SEC Speaks in 2009 event in Washington on Friday that the so-called e-Proxy rules, which enable companies to deliver their annual meeting materials online without investors opting in, has led to steep declines in the number of small and large investors voting at annual meetings.
He said some reports indicate that less than 5% of individual investors voted at meetings after receiving a notice in the mail advising them to go online to view the proxy materials and cast their votes. Other statistics comparing participation by the same investors before and after the notice-and-access model found a 30% drop in participation for large investors and more than 60% for smaller investors.
“For these investors, access clearly didn’t equal delivery,” said Aguilar.
He said that while he recognized companies could cut costs using the notice-and-access option under the e-Proxy rules, the SEC should make sure that cost savings do not hinder investors from exercising their rights.
“I strongly suggest we move quickly to reconsider e-Proxy, improving it if possible, repealing it if necessary, but with the goal of restoring investor participation,” said Aguilar.
It’s not the rule, it’s the implementation
While I have been critical of e-Proxy throughout the first year, I don’t want to see it scrapped. The rule itself is a good one, but it has been implemented poorly by companies and their vendors.
To its credit, the SEC’s Division of Corporation Finance has been meeting with various players in the industry to find ways to improve the process. Attention thus far appears to have been focused on improving the notice investors receive advising them their meeting materials are available online.
Broadridge Financial Solutions (NYSE:BR) has produced a new notice and an envelope with a call to action printed on the face that is meant to draw investors’ attention to the need for them to vote.
However, putting the emphasis only on voting misses the fact that e-Proxy is principally a delivery rule — and delivery is not happening.
According to figures provided to the staff of SEC commissioner Elisse Walter (PDF 13 pages, 825KB) by representatives of Broadridge, uninformed voting is another unanticipated outcome of the rules. Fewer than 0.5% of investors receiving a notice of internet availability actually accessed the proxy materials prior to voting.
Importance of online user experience
To my mind, the real issue is that the online materials are not being offered in convenient formats and the online experience is a turn-off.
This is the more serious problem because even if you manage to get more people to go online by sprucing up the notice, future participation will return back to current levels if people have a poor online experience.
I think the SEC has dropped the ball by not enforcing key provisions of the rules that impact on the online user experience of e-Proxy. The staff should have clarified the cookies issue quickly so that more companies hosted their proxy materials on their own websites instead of sending shareholders off to one or more service providers.
And the SEC should have been stricter in enforcing the requirements for the online materials to be in a format or formats convenient for reading on a computer screen and for printing. I’ve written in detail about that in the latest issue of investorrelationships.com.
Issuer’s right to use e-Proxy should hinge on participation targets
Rather than scrap the rules, I’d like to see companies have to qualify to use them. While any company should be able to try notice-and-access for a first time, only those that achieve a specific level of participation should be permitted to use it the following year.
At present, we have companies that saw huge declines in participation by retail investors happily going forward to use notice-and-access again this year simply as a cost saving exercise.
They shouldn’t have the right to use e-Proxy again because the evidence is clear that they and their shareholders are not ready for it.
If a company fails to meet a specific participation threshold, it should be prohibited from using notice-and-access again for two years (i.e. its next annual meeting). Two years is about how long it will take for a company to take steps to condition its shareholders to routinely rely on its website.
Such a qualification scheme will reward companies that are indeed putting in the required effort to make their shareholder meetings an engaging and worthwhile experience on the web. And it will make other companies think twice before using notice-and-access for the wrong reasons, of which there is more than one.
I think Commissioner Aguilar is absolutely right, in the current market environment the SEC should move quickly to close the loophole that e-Proxy has given unscrupulous companies that want to hide information from their shareholders.