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We have been doing this for more than two decades. The Forum programs
were initiated in 1999 by the CFA
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Security Analysts) with lead investor and former corporate investment
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of the Society’s members.
Independently supported by Mr. Lutin since 2001, the Forum’s public
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The Forum's ability to convene all key decision-making constituencies
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The Forum welcomes suggestions for its continuing support of fair access
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Responding to the recent increases in investor engagement and activism,
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February 2010 cover story
Where will 452 lead N&A?
Changes to NYSE Rule 452
may kill off notice and access
By Elizabeth Judd
Where will 452 lead N&A?
• Changes to Rule 452 may kill off notice
• Level of retail ownership determines
impact of change
• Cost saving not the sole factor in
• Technology may help protect the retail
By Elizabeth Judd
After a stormy beginning, notice
and access seemed to have finally found its groove. Many companies realized
that while the savings to be had were not necessarily earth-shattering – and
yes, the drop in retail participation was worrisome – delivering proxy
materials electronically still made good business and ecological sense.
With changes to Rule 452 making the election of directors no longer a
routine matter voted at the broker’s discretion, some corporate secretaries
are now doing an about-face on notice and access. At the same time, they’re
scrambling to rethink their entire proxy strategies in light of what seems
certain to be a depressed retail vote in spring 2010.
holders tend to be very supportive of management on the election of
directors, but they just don’t vote in large numbers,’ says Paul Schulman,
executive managing director of the Altman Group, a proxy solicitation firm
based in Manhattan. He points out that the growing popularity of notice and
access has meant retail vote levels, which have historically been quite low,
have fallen farther still – and the elimination of the broker discretionary
vote means these numbers will almost certainly drop further.
Adding to the sense of skittishness on the part of companies are other
changes looming on the proxy horizon. ‘Institutions are becoming much
tougher on their criteria for voting for directors,’ notes Schulman. ‘In the
past, the routine vote has helped protect directors, in some cases from
significant withhold votes. With the discretionary vote gone, however,
directors are losing that protection.’
Rachel Posner, senior managing director and general counsel at Georgeson,
adds: ‘Companies are definitely concerned about the elimination of Rule 452,
and those that aren’t concerned don’t necessarily understand the
ramifications of it.’
The most obvious dividing line between companies that are extremely
concerned and those that are nonchalant is relative levels of retail
ownership. ‘For companies with a 10 percent or even 20 percent retail base,
the effects will not be so dramatic,’ says Abigail Jones, vice president of
compliance and corporate secretary at Questar Corporation. With
approximately 20 percent retail ownership, Questar doesn’t plan on
jettisoning notice and access, but it is considering stratifying its
approach to e-delivery.
A range of issues
Beyond retail ownership, companies are weighing various factors before
deciding the fate of notice and access, or e-proxy. Key questions include
whether a company has a majority voting standard, whether its directors are
vulnerable to withhold votes because of compensation or other controversial
issues, and whether the policies of major institutional holders place a
company’s directors in jeopardy.
At present there’s no clear answer for how to proceed with so many question
marks, stresses Jones. ‘Each company is going to have to look at this issue
on a case-by-case basis and determine whether notice and access makes sense,
depending on how a whole range of things fit together,’ she points out.
Posner agrees. The proxy landscape, she says, is ‘like an ecosystem – one
slight change can cause ripples everywhere else.’
Johnson & Johnson has not used e-proxy in the past and won’t begin doing so
this year, maintains Doug Chia, senior counsel and assistant corporate
secretary. ‘The elimination of 452 is enough of a factor for us to believe
this is not the year to be experimenting with notice and access, whether
stratified or not,’ he explains.
Chia says companies that have already gone the e-proxy route may find it
more difficult to pull back now. ‘Once you save that kind of money from the
budget, it’s hard to go back and spend it again,’ he says. And according to
Chuck Callan, senior vice president of regulatory affairs at Broadridge, the
number of notice and access users rose sharply in the past year: from July
1, 2007 to June 30, 2008, there were 653 e-proxy users; from July 1, 2008 to
June 30, 2009, there were 1,363. The fate of notice and access may hinge on
how much money was ultimately saved. At many companies, says Posner, it
simply wasn’t the cure-all everyone expected.
A 2009 survey by the National Investor Relations Institute and the Society
of Corporate Secretaries and Governance Professionals bears this out: 33
percent of respondents who used notice and access for the first time in 2009
spent between 75 percent and 99 percent of the prior year’s budget, and 16
percent saved nothing at all. What’s more, 8 percent of respondents actually
saw their costs increase.
The dollars and cents of e-proxy constitute only one issue, though. Another
is understanding a firm’s shareholder base and how its voting patterns will
be affected by electronic delivery. For instance, Jones says Questar has
done e-proxy from the first year it was able to and has reaped ‘significant
savings’. She is, however, concerned about statistics indicating that retail
voting may drop by 50 percent or more since the elimination of the broker
discretionary vote. ‘I wouldn’t say it’s the death knell of notice and
access, but it’s going to cause people to look at notice and access far more
carefully,’ she says. This proxy season she’s considering a stratified
approach to electronic delivery – an approach that had been gaining in
popularity even before the changes to Rule 452.
Understanding your audience
Dannette Smith, corporate secretary at UnitedHealth Group, predicts that
changes to Rule 452 won’t wreak particular havoc on her company given that
its shares are around 90 percent institutionally held. What’s more, she
estimates that broker non-votes accounted for just 8 percent of the overall
vote last year.
Smith finds that her company can stratify e-proxy and still save a
considerable amount of money. UnitedHealth sent any shareholders who had
voted by phone or proxy in either of the last two years a paper mailing. In
2009 UnitedHealth had approximately 275,000 retail holders; of those, 48,000
– or 17 percent – received a full package mailing, says Smith. By designing
e-proxy this way, UnitedHealth avoided any drop-off in the retail vote.
Smith also points out that the question of whether a company has a
majority-voting standard – and precisely how that standard is structured –
can prove critical. UnitedHealth changed to majority voting two years ago,
but the company’s articles state that the majority to be achieved is the
majority of the votes cast. That means the broker non-vote comes out of both
the numerator and the denominator of the voting equation, lessening the
overall effect. When Smith recalculated last year’s votes by removing the
broker non-vote, the difference came to less than 1 percent, she says. ‘The
repeal of 452 shines a spotlight on the fact that you really have to know
your shareholder base,’ she adds.
Companies must also identify which brokers their retail shareholders used
and how these brokers dealt with Rule 452 during the past few years, when
the elimination of the broker vote seemed inevitable. During this time, some
brokers voluntarily stopped voting their clients’ shares, while others chose
to vote retail shares proportionately.
Minimizing the impact
the company knows its precise situation, it can try to partially rebuild any
losses in the retail vote through a shareholder outreach program. A good
program, says Posner, hinges on distinctively designed and written proxy
packages and a first-rate website. Companies may want to send shareholders
reminder letters or buck slips to increase the vote, or they might make
solicitation phone calls to their larger retail shareholders, reminding them
of deadlines and explaining how they can vote online or by phone.
Another step is making directors more distinctive and memorable for
shareholders. On December 16, 2009, the SEC amended its governance
disclosure requirements. Public companies are now required to disclose the
specific experience, qualifications, attributes and skills of each director
and board nominee. In other words, the SEC wants shareholders to know why a
company deems a specific individual worthy of occupying a board seat.
Sylvia Groves, principal and founder of GG Consulting in Calgary and former
assistant secretary and governance officer at Canadian energy company Nexen,
applauds the move. ‘With retail shareholders, you want to give them
something short and sweet,’ she explains. ‘I can see why investors aren’t
voting – too often, the names are meaningless to them. It could be the names
of 10 al-Qaeda members and they wouldn’t know the difference. If you don’t
give them some sense of context, there’s simply no way you’re going to get
those votes in.’
When it comes to reaching retail investors, technology may save the day.
Chia points out that Johnson & Johnson is experimenting with social media,
specifically by stressing the importance of proxy voting on the corporate
blog. Meanwhile, Broadridge has launched two new online products to enhance
shareholder engagement, says Callan. At its November 2009 annual meeting,
Broadridge hosted an electronic shareholder forum for validated investors
and even held its annual meeting virtually, allowing shareholders to vote
their proxies online and in real time.
Darrell Heaps, CEO of Q4 Web Systems in Toronto, points out that today’s
retail investors conduct 85 percent of their research online. He also says
that, as of March 2009, two thirds of the online population visited social
networks and blogs on a daily basis. ‘If someone is using the web to do
research, he/she is likely participating in some form of social network like
Facebook or Twitter,’ he notes. ‘If you know your shareholders are online
and using social media, our advice is to fish where the fish are. There’s an
opportunity for a company to get in front of shareholders by putting content
and information into the same channels.’
That said, even the most cutting-edge technology will only boost
participation so much. ‘You can try to educate and convince people to vote
until the cows come home, but it might not happen,’ says Chia. He points out
that, even in presidential elections, voter participation hovers at around
50 percent. ‘With a get-out-the-vote campaign, you have to be realistic,’ he
adds. ‘It’s hard to get people off the couch to vote if they don’t feel they
have anything vested.’
Preparing your directors
The demise of the broker vote is spurring companies to look long and hard at
their directors in an effort to foresee any potential problems that might
crop up during an election campaign. Schulman notes that proxy solicitors
are increasingly being asked to conduct director vulnerability assessments
so that companies aren’t blindsided by a ‘vote no’ campaign. The numbers
suggest this concern is well founded: as of September 23, 2009, RiskMetrics
reports that 93 directors at 50 US companies had received majority dissent,
relative to just 32 directors at 17 companies who failed to achieve majority
support in 2008.
Encore Bancshares, which has a relatively small shareholder base and has
shied away from notice and access, is actively educating its directors on
what to expect in a post-Rule 452 world, says Rhonda Carroll, senior vice
president, corporate secretary and chief compliance officer at Encore. ‘Our
directors are used to getting a high percentage of support and, while I
don’t expect any of them not to get elected, they may get a lower percentage
of votes than they’re accustomed to.’
Using a PowerPoint presentation, Carroll showed the directors where Encore’s
votes typically come from and how things might change this year once the
discretionary vote is gone. She believes that prepping the board is
essential. ‘You can deal with pretty much anything, but you really don’t
want to surprise your directors,’ she warns.
Chia agrees. ‘Any board member paying attention will see that what’s
expected these days has changed dramatically from two years ago,’ he says.
‘They’re looking to us to give some kind of expert opinion in terms of what
they can expect.’
A director who fails to be reelected – or is elected only by the slimmest of
margins – might trip off other problems by signaling to activist investors
that the company has an Achilles’ heel, says Schulman. At the same time,
candidates might feel less than enthusiastic about joining a board where
future colleagues had been subjected to the humiliation of nearly losing an
election. Groves believes this spring’s proxy results could provide a
wake-up call about shareholder outreach. ‘It won’t take many cases of a
director not getting the vote to open people’s eyes,’ she says.
Changes on the horizon
Jones points out that if the retail vote diminishes, the institutional vote
carries more weight than ever. For this reason, she’s focusing her attention
on RiskMetrics, Glass Lewis and the other shareholder advisory services,
which often shape the hot-button issues in a given proxy season. Chia
recommends cementing shareholder relationships early because once
RiskMetrics or Glass Lewis has issued an opinion, it’s usually too late to
change minds. ‘When recommendations come out from RiskMetrics and Glass
Lewis, the votes move very quickly,’ he cautions.
In addition, companies need to watch all possible changes to ‘proxy
plumbing’ and non-objecting beneficial owner/objecting beneficial owner
status that might affect how proxies are voted. Smith is keeping a close eye
on a proposal that would allow shareholders conducting a ‘vote no’ campaign
to distribute copies of the proxy card to other shareholders, for example.
Were this to be permitted, she asserts, ‘there would be a further shift in
power toward shareholders who want to unseat the board.’
Chia predicts that the next six to 18 months will resemble the time period
when Sarbanes-Oxley unfolded. ‘If you look at what Congress and the SEC have
passed in the wake of the financial meltdown, this is a moment when people
are collectively saying, We have to make major adjustments – and companies
will have to figure out how to deal with all this change.’
Smith encourages corporate secretaries to view the myriad changes taking
place within the proxy process holistically. ‘Each change on its own may not
seem that big,’ she concludes, ‘but put them together and the effects can be