Promoting Shareholder Communication and Participation

Technology is lowering the cost of corporate compliance, and this is most evident in the technological advances in shareholder democracy.  Technology has greatly facilitated communicating with and informing shareholders, and mechanisms for proxy voting have been greatly improved using various technologies over the last decade.  Corporations can realize substantial cost savings by using new communications facilities for virtual shareholder meetings, but recent steps by major corporations toward virtual-only shareholder meetings have been met with protests from shareholder activists, even though virtual shareholder meetings can enhance shareholder participation.

A leading provider of virtual shareholder meeting technology is Broadridge Financial Solutions, once a division of Automatic Data Processing, Inc., now independent.  Broadridge historically handled the back-office administrative processes of distributing proxies and tabulating voting instructions from its bank and brokerage clients.  Broadridge recently developed and commercialized its technology for virtual shareholder meetings.  One can view Broadridge’s technology in use for Symantec’s 2010 annual meeting at: https://central.virtualshareholdermeeting.com/vsm/web.do?pvskey=symantec&.  Other providers of similar technology are Wells Fargo Shareowner Services, which hosted a Charles Schwab shareholder meeting in May 2010 and Computershare announced a new meeting platform in mid-2010.  Technologies that qualify shareholders to vote in real time — as opposed to having a pre-registration for voting sometime before the shareholder meeting — have an advantage in promoting shareholder participation.

Delaware Leads the Way

Delaware in 2000 was the first state to adopt corporate code provisions allowing for entirely virtual shareholder meetings.  Currently — according to a paper published by Lisa Fairfax at the George Washington University Law School in June 2010 — a total of 32 states have adopted corporate law provisions allowing for either virtual shareholder meetings or virtual shareholder participation at in-person shareholder meetings.  Of these 32 states, Ms. Fairfax found that 24 states have provisions allowing for shareholder meetings that have no in-person component, a true virtual-only shareholder meeting.

Delaware’s General Corporation Law Section 211 provides that a corporation’s board of directors alone may establish procedures for a virtual shareholders meeting provided that (1) stockholders can participate, and (2) such stockholders can be verified as present and voting at such meeting.  The Board need only take “reasonable measures” to verify the participants are stockholders or proxyholders, and afford them an opportunity to participate and vote.  According to Ms. Fairfax’s study, 17 states follow Delaware’s model, and the other 7 states allowing for virtual-only shareholder meetings use more flexible provisions that merely require that shareholders hear and be heard by the other shareholders.

There are a variety of other restrictions and procedures for either virtual-only shareholder meetings or remote shareholder participation imposed by other states.  Two states restrict the use of virtual-only shareholder meetings to private companies only.  Some states require that a provision for a virtual shareholder meeting be specified in the corporation’s bylaws, and California requires shareholder consent by each specific shareholder to any electronic notice or electronic meeting, at least with regard to such individual shareholder’s participation in such modes of communication.

Recommended Compliance

Accordingly, it is recommended to review and comply not just with the underlying corporate statute, but also the corporation’s certificate of incorporation, bylaws, and approved director resolutions, if provisions for virtual shareholder meetings are required to be contained in these fundamental corporate documents.

Furthermore, compliance officers should also ensure that these fundamental corporate documents are in compliance with the underlying corporate statute.  The Delaware statute is usually amended annually in some fashion, and a corporation’s bylaws may lag behind Delaware in being state-of-the-art.

To date, the major stock exchanges have not added their own rules on virtual shareholder meeting or remote shareholder participation for shareholder meetings.  Their rules remain straightforward in that they merely require an annual meeting.

Why the Fuss?

The protests against virtual shareholder meetings are focused principally on “virtual-only” shareholder meeting where there is no in-person component.  Thus, the virtual meeting, rather than promoting participation at the meeting by allowing remote participation in addition to in-person participation, some argue is constraining communication and deliberation by forcing all shareholders into an impersonal electronic system.  Some shareholder activists believe that “virtual-only” meetings insulate management, limit confrontation, limit questions to management, and therefore minimize accountability of management to the shareholders.  Intel in 2009 announced that its shareholder meetings would be virtual only, but after complaints from shareholders, Intel backtracked and went to a “hybrid” meeting (in-person and virtual) for 2010.  Proctor & Gamble amended its bylaws to allow for virtual-only meetings, but after shareholder complaints P&G delayed instituting virtual-only meetings.

Symantec, over protests (including those lodged by CalPERS and CalSTRS), held a virtual-only meeting in 2010.  A question was posed to management about the format of the meeting, and CEO Enrique Salem noted that two to three times as many people were attending virtually than had previously attended the live meeting.  It was not clear how many additional shares this additional participation represented.  The flap about the meeting format was reported on the cover of the September 26, 2010, Sunday New York Times business section (available at: http://www.nytimes.com/2010/09/26/business/26gret.html?_r=1&pagewanted=all), and Symantec later announced it would conduct a hybrid meeting in 2011.

Proponents of virtual shareholder meetings argue that shareholder democracy and greater accountability is promoted because of greater shareholder participation.  Proponents also say that questions posed online can be more frank and confrontational than those made in person at shareholder meetings.  Furthermore, supporters say that Robert’s Rules of Order — the guidelines for conducting meetings of deliberative bodies — are not sacrificed in the virtual meeting, and that anything that is done in person can be done virtually, including offering a streaming video of the meeting so shareholders can view the body language of management.

Then, of course, there is the issue of cost.  Virtual-only meetings, even after the cost of the technology services, are just a fraction of an in-person meeting.  Hybrid meetings of course add to the cost of the in-person meeting.  Inforte Corporation, which has had virtual-only meetings for several years, was reported to have spent about 1/10 the cost of its in-person meetings.

Questions remain about whether virtual meetings improve attendance or participation, and it is not clear if these types of meeting will deliver on the real goal of corporate democracy, that of improving corporate performance.

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This Forum program is open, free of charge, to anyone concerned with investor interests in the development of standards for conducting shareholder meetings with electronic participation. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was encouraged by Walden Asset Management, and is proceeding with the invited leadership support of Broadridge Financial Solutions, Inc. and Intel Corporation to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of leadership relating to the issues being addressed.

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