Antiquated’, ‘unfair’ and ‘dysfunctional’ are all terms that are
frequently bandied about to describe America’s proxy distribution system.
The chief complaint is that brokers are responsible for hiring a firm to
distribute proxy materials and other shareholder communications to
beneficial holders, and then the issuers foot the bill. On top of that, one
outfit – Broadridge Financial Solutions (formerly ADP) – has a near monopoly
on distribution and fulfillment services.
The exact percentage of the beneficial shareholder market Broadridge
controls is unknown. Chuck Callan, senior vice president of regulatory
affairs at Broadridge, wouldn’t comment beyond saying his company serves the
‘lion’s share of the market.’ Meanwhile, Arthur Rosenzweig, president of
Manhattan-based Mediant Communications, a successful new entrant into the
proxy fulfillment services market, notes that there are currently more than
90 million beneficial accounts up for grabs and estimates that anywhere from
95 percent to 98 percent of them are served by Broadridge.
‘It’s the brokers’ choice who does the distribution because they control the
data necessary to do shareholder communications,’ explains Diana Bourke, CEO
and president of Inveshare (formerly Swingvote) in Atlanta, Georgia. ‘But
it’s the issuer that is responsible for paying the fees for corporate
actions and proxy delivery. It’s one of the most unique business models
you’ll ever see.’
Bridget Hughes, director of products and services at Bowne, which has
partnered with Mediant in the launch of its proxy services, puts it this
way: ‘The issuer doesn’t have a choice in who it uses, but it has to pay the
rates Broadridge has agreed with the banks and brokers.’
Lack of choice and monopoly situations are not concepts with which Americans
and their companies are usually comfortable. It is often considered that a
lack of competition results in non-dynamic pricing and disincentive for
innovation. Potential competitors also complain about unfair barriers to
entry. Competitors aren’t the only ones demanding change, however. The
Shareholder Communications Coalition, an advocacy organization, is pushing
to reform the current proxy system, leveling the same complaints.
Critics have long-predicted that the times, they are a’ changing for proxy
distribution. Yet, until recently, no real change has materialized. The
present moment, many argue, is different. Notice and access has made
electronic distribution a reality, and the number of those opting for
e-delivery is rising. Between July 1, 2008, and February 28, 2009, 11
percent of all shareowner distributions occurred through the notice-only
model, up from 8 percent during the same period a year ago, says Callan.
Opening up the market
Now that the proxy distribution system relies less heavily on paper
distribution – and the expensive infrastructure associated with print and
postage – the barriers for new entrants are lower, observes Hughes. As with
any natural monopoly, however, the highest hurdle is often securing the
first contract.
Participants have attempted to get into the space over the years but none
gained much traction. In November 2008, Mediant broke the barrier,
announcing its relationship with Legent Clearing, an Omaha, Nebraska-based
clearing broker with 85 correspondent brokers, all of whom use Mediant for
proxy delivery to beneficial shareholders. Meanwhile, Inveshare recently
signed its first client, an online broker whose name it will reveal within
the next few months after implementation has been completed, according to
Bourke.
For years, issuers and other critics of the proxy distribution system have
pinned their hopes on the SEC either regulating Broadridge or paving the way
for others to compete in the market. This has yet to happen. ‘Despite
pushing from the issuer community, the SEC has largely declined to regulate
Broadridge in any sense,’ says Geoff Loftus, vice president of the Society
of Corporate Secretaries and Governance Professionals. Given that regulatory
action seems unlikely, the catalyst for change may be the competitors
themselves.
A base of familiarity
Founded in 2002, Mediant currently works with hundreds of issuers to deliver
communications to registered shareholders, says Rosenzweig. In its proxy
distribution for beneficial shareholders, Rosenzweig emphasizes that the
broker’s branding and message are paramount. ‘When clients of all 85 of
Legent’s correspondent brokers get shareholder communications from us, we’re
in the background,’ he notes. ‘They see the colors and the message of the
correspondent broker.’ By contrast, many have faulted Broadridge for sending
out standardized communications in which the identity of both the broker and
issuer are easily lost.
The benefits of competition – in addition to the natural change that was
beginning to emerge already – are felt by all players in the market. The
single most significant change is technological advances that make the
fulfillment process faster, cheaper and more efficient. Technology is
allowing revolutionary change by bringing down the cost of shareholder
communications to the benefit of brokers, issuers and, ultimately,
shareholders, notes Rosenzweig. He also points out that Mediant’s network
system promotes transparency because issuers can verify that large blocks of
shares have been voted, while shareholders know their votes have been
tabulated.
Ray Maratea, co-president of Legent, spoke with Mediant for more than a year
before deciding to leave Broadridge. Legent’s decision to use Mediant was
based on ‘the economics, the technology and the positive impact to our
clients,’ Maratea says, adding that ‘the implementation went rather
seamlessly.’
Inveshare is taking a slightly different approach and specifically targeting
online brokers because they have ‘the perfect scenario for electronic
delivery,’ says Bourke. Inveshare’s first client is an online broker, adds
Bourke, and ‘our solution has been to take what has been predominantly paper
delivery to almost complete electronic delivery after the implementation.’
Peter Friz, executive vice president of sales and market development for
Inveshare, believes his company is unique in its focus ‘on online education
and content and improving the overall experience for the online investor.’
Friz emphasizes that Inveshare can improve existing communication channels
‘by adding more conversation around important corporate events, such as
proxies.’
Breaking into the market
Even though Mediant and Inveshare have each gotten a foot in the door,
Loftus remains skeptical. ‘The situation is ripe for competition, but at the
moment Broadridge is riding a gigantic winning streak,’ he says. ‘Until
someone gets in there and shows he or she can compete, I’m not going to say
Broadridge has a realistic competitor.’
One reason why competitors are having trouble breaking in is Broadridge’s
track record. ‘Broadridge has done a truly phenomenal job and it deserves
credit for putting together a system that has allowed shareholder meetings
and voting to take place for a period of well over 10 years with very few
snafus,’ explains Rosenzweig. ‘Information has been distributed and votes
have gotten in, and this isn’t an easy task.’
That said, Broadridge also owes much of its success to its near-monopoly
status, which it inherited from predecessor ADP. Hughes points out that most
brokers view proxy distribution as ‘a piece of a bigger pie’ and that
Broadridge has pushed bundled contracts that also provide for the
distribution of mutual fund prospectuses and communications. In addition,
Broadridge has gotten clients to sign long-term contracts, says Rosenzweig,
noting that it can take several years before a competitor can wrest away the
business.
While there is little doubt the emergence of new players is encouraging
change, it is worth noting that several important advancements have taken
place in the past few years, driven by Broadridge before new entrants made
their appearance. With an intense focus on cost cutting, saving money is
high on every broker’s and issuer’s wish list. Broadridge has compiled
statistics to show how the adoption of new processes such as notice and
access and other technologies are saving issuers money.
From July 1, 2007 through March 31, 2009, issuers have saved more than $260
million in connection with beneficial shareholders receiving materials
electronically, says Callan, noting that this number is based on
Broadridge’s processing statistics and the National Institute of Investor
Relations’ (NIRI) estimates of the cost of printed materials.
A lack of clarity
That said, fees are clearly the Achilles’ heel in Broadridge’s model. Loftus
acknowledges that Broadridge has produced ‘a lot of statistics’ about cost
savings, but the problem remains that, without effective competition, ‘we
have no way of really knowing’ whether the fees are fair. Broadridge’s fees,
he says, are ‘the thing our members go craziest about.’
Rosenzweig believes the current fee structure, which is set by the NYSE
after reviewing information from Broadridge, is not the best answer.
Inveshare agrees. So do many issuers. How Broadridge sets fees is a mystery
to issuers and even many brokers, says Bourke. ‘To say it’s a black box is
oversimplifying,’ adds Friz, who notes that no one knows precisely what
brokers are being charged and what, if anything, they’re retaining as
revenue for delivering communications to beneficial shareholders.
Rather than confront the regulators, Mediant has chosen to ‘unilaterally
lower the basic proxy fees for all beneficial shareholders.’ For listed
companies whose beneficial shareholders receive materials through Legent’s
brokers, the basic processing fee has gone from 40 cents to 30 cents per
beneficial account, says Rosenzweig.
Inveshare is convinced it can reduce costs to issuers most dramatically by
promoting electronic delivery. ‘We’re able to drive significant levels of
electronic delivery, which, by definition, saves the issuer money in
postage, print and handling of paper materials,’ notes Friz.
Beyond fees, Broadridge, Inveshare and Mediant can also help remove
impediments to e-delivery by, for instance, helping increase disappointing
levels of retail participation. Typically, says Callan, around 20 percent of
individual investors vote their proxies but, with notice and access, this
has dropped to less than 5 percent.
Broadridge is working with issuers and brokers to find a solution and is
exploring the possibility of individual shareholders giving ‘standing
orders’ for how they would like to vote a particular issue, much as
institutions do today. Were a broker to provide education around proxy
voting and allow ‘standing instructions’ for common proxy initiatives,
Callan believes retail participation would rise.
Moving ahead
No question, technology is remaking the proxy distribution space, and
Broadridge is at the forefront of that change. On May 20, Broadridge broke
important new ground when it helped Intel hold the first-ever virtual
shareholder meeting, where shareholders could log in, ask questions and cast
votes in real time. ‘This is the first time shareholders have had the chance
to vote at the meeting online,’ says Callan.
With the success of Intel’s meeting, it is likely many other issuers will
examine the possibility in the future, and possibly seek Broadridge’s help.
The ability to conduct real-time, accurate and efficient voting will greatly
benefit not just shareholders but also the issuers. This development,
initiated by Broadridge, could dramatically alter the way annual meetings
are conducted and how the shareholder vote is managed.
With changes coming thick and fast on the technological and regulatory
fronts, the notion that there will also be changes in how proxies and other
shareholder communications are delivered to beneficial shareholders seems
increasingly clear. For now, issuers and brokers are avidly watching
Broadridge’s latest competitors and the developments that competition is
likely to bring.
