EARLY RETURNS FROM THE

2017 MEETING SEASON

While it’s still early-days as we write this, the 2017 season is off to something of a roaring start, with howls of protests from activist investors about “Virtual Only” shareholder meetings.

The loudest and potentially the scariest howling to date has come from New York City Comptroller Scott M. Stringer, who oversees $170 billion of pension fund assets and the votes thereon. He  plans to  write to  each  of their portfolio companies to tell them that if they conduct a virtual- only shareholder meeting the NYC funds will withhold their votes from directors who serve on the governance  committees…and maybe, they will start to do so this season.

The Council of Institutional Investors, a non-profit group of corporate, public and union pension, employee benefit and endowment funds -  whose members control  the votes on  over  three trillions dollars-worth of shares - has an official policy that virtual meetings should be used as     a supplement to shareholder meetings, and not as a replacement for in- person meetings. Many of the Council members also seem likely to us to take similar actions to withhold votes from VSM-only companies after a fair warning - or maybe even  beforehand.

No howling, but much thoughtful input from Timothy Smith, our much esteemed friend of 40+ years, who is the Senior Vice President and Director of ESG Shareowner Engagement at Walden Asset Management. Tim has written to senior management and two directors at ConocoPhillips - in his unfailingly polite and diplomatic way - pointing out over a half dozen governance “issues” he has with virtual-only meetings, calling them “alarming” and “creating a ‘slippery slope’ (that) encourages other companies to insulate themselves from shareholders…and sends a terrible signal that ConocoPhillips wants to flee from owners, and only allow an electronic or telephone exchange.”

Smith’s letter simply requests that the Board “review the decision” to hold a virtual-only meeting this year “and return to an in-person shareholder meeting in 2018.” We suspect that other companies in the Walden portfolio who hold virtual-only meetings this year will get similar letters from Tim - and likely from other institutional investors too - and we strongly suspect that many institutional investors will end up withholding votes on some directors if their requests are ignored… which would not be a good thing to happen.

We ourselves absolutely love Virtual Meetings - and we are 100% OK with Virtual-Only Meetings at companies that have only routine proposals on the agenda and where, historically, few or no shareholders have shown up. We are, in fact, very concerned that if virtual- only meetings were to be universally outlawed by the governance gurus, it would pull the rug out from virtual meetings altogether - which would be a bad thing.

But at the same time, we absolutely agree that if there are important governance or policy or performance “issues” out there - a company should not hold a virtual-only meeting - unless they are sure that shareholders - and especially shareholder proponents - will be OK with it.

In fact, we have written and advised from the get-go that there is a built-in governance mechanism already in place - courtesy of the worldwide web - whereby, if companies overstep reasonable bounds of propriety, they, and their officers and directors, will be widely criticized by big and small investors alike - and very publicly shamed in the media…and rightly so… We are seeing a bit of the potential for backlash this very season.

So what is a good corporate citizen to do, as we so often ask here and try to answer?

First, we think, is to keep our eyes on the prize, and to recognize that a so-called Hybrid Virtual Meeting, with a live visual feed, is indeed the “gold standard” for shareholder meetings - where every single shareholder can attend or later review the meeting, but still show up in person if they feel they should - as long as they pay their own way.

If there are shareholder proposals on the ballot, companies could and should try to arrange for shareholders to go to a studio, or to a place with e-conferencing facilities (which many firms or their law firms already have in place, often around the country). Failing that - as we wrote five years ago - no virtual-only meeting should be held in our book if a single shareholder wants to attend, gives the company reasonable prior notice and gets to a company-designated site on their own dime. It’s hugely ironic, by the way, that public companies themselves urged the SEC to pass a rule that shareholder proposals need not be put to a vote if the proponent fails to show up!

Second, we think, is to recognize that shareholder proponents - and any shareholders that want to be heard - probably have a right to be seen as well as heard when they ask a question if they insist on it. And ideally, the company’s responder should be seen as well as heard too. Also, the questioner should also have the right to ask a proper follow-up question and get a proper answer, just as they would at an in-person meeting. Currently there ARE ways to allow this to happen without the shareholder having to go to a remote location, and we do believe that this can be arranged in a way that companies could still book the savings that come from not having to book a big hall somewhere.

Third, we all need to recognize that only a fool would fail to try to ‘tilt the table a bit’ in favor of friendly questions and comments when the opportunity is there. And only a bigger fool would blithely award a company the full benefit of the doubt here. We are fine with taking questions in advance - and trying to consolidate related questions into a single Q&A item, which can be a very helpful thing indeed - and with taking questions over the Internet in real time. But we feel strongly that the only fair way to take questions at a virtual meeting is to also allow shareholders who may wish to do so to call in and get in a queue, just as they would at an in-person meeting. Then, the Chair could and should alternate the questions among advance questioners, telephone questioners waiting in line and Internet questioners - dividing the time fairly, in proportion to the various sources of pending questions. (A few enlightened companies have promised to publish all of the questions they get from all sources - and to publish all of their answers if there is no time to provide them during the meeting itself - in the interest of providing full transparency.)

Your editor is a member of a “Virtual Meeting Working Group” - heavily represented by institutional investors - that is working toward reviewing, revising and publicizing “best practices” that will allow companies and investors to take the maximum advantage of technology - and to use new technologies as they emerge - while preserving all of the traditional rights of shareholders… We think there is still good and useful work to be done, so stay tuned…

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