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Comments of
Ronald M. Schneider
March 24, 2011
Fifth Call Objectives,
and Incremental Alternatives
Karen Kane’s comments
about the proposed “Fifth Analyst Call” (“Enlightened Companies: Step Up
and Co-opt the Fifth Analyst Call”) were themselves very enlightening, and
touched on several significant issues. These include equal treatment of
all investors, direct communication between companies and their investors,
by-passing or minimizing the influence of proxy advisor “intermediaries”,
the role of directors versus management in this process, and improving the
clarity of proxy disclosures. These are issues which my firm as a
provider of corporate governance and proxy advice, as well as our parent
American Stock Transfer (AST), consider important to the success of our
clients.
Before providing an
assessment of the likelihood of the “Fifth Call” concept catching on in
the US, let’s keep in mind the over-riding objective of investor
engagement and disclosure, which is to help investors understand and have
confidence in their company’s executive leadership, board oversight,
strategies and efforts to grow shareholder value. If this is
accomplished, then rationally, companies generally should have the support
of the majority of their investors for those actions requiring shareholder
approval which are consistent with achieving these already-communicated
and understood corporate objectives. If and when investors lose
confidence in the company’s leadership, strategies and their execution,
then they naturally should make their dissatisfaction known, through
dialogue as well as by withholding their voting support.
Unfortunately, the
process is not entirely rational. While informed proxy voting often
requires specialized focus and resources, particularly for institutional
investors owning thousands of companies, too often voting has become
separated from the original investment thesis, and the (governance) tail
wags the (performance) dog.
Here are some of the
problems as we see them, and ways companies are addressing them:
1.
Though well-intended, continual expansion by the SEC of required proxy
disclosures is leading to ever-longer proxy statements, which increasingly
are not read, nor are votes cast (particularly by retail investors).
Companies often compounded this by treating the 14A simply as a required
filing, and not as a communications and “selling” tool. There is hope,
however. Over the past several years and often in response to investor
feedback, an increasing number of leading companies are truly embracing
transparent, plain English disclosures, which we think are helping them
gain critical shareholder voting support, and thus providing them with a
competitive advantage. Very recently, GE raised the bar through its
innovative 4 page “Proxy Summary”, which can be viewed
here.
In similar fashion,
Prudential Financial continues to innovate. In their recently filed
proxy, they begin by reminding investors of last year’s offer to “plant a
tree” (or receive an eco-friendly tote bag) simply for voting, which they
indicate resulted in 68,000 shareholders voting who did not do so the
prior year – an offer they are continuing this year. Their proxy again
includes a “letter from our board of directors to our shareholders” (again
signed by all members of the board), which, combined with a NEW two page
“summary information” section, highlights key business accomplishments and
voting items, with reference to the 10-K and proxy statement for the
complete disclosure. As previously, their proxy card prominently features
a large “comments” section for shareholder feedback. Prudential’s proxy
can be viewed here.
Another proxy
companies should review, which should be filed within a few weeks, is
UnitedHealth Group’s, which is perennially cited as a leading example of
transparency, plain English and clear navigation. There are many other
excellent examples, and we applaud these companies and their initiatives.
While companies and investors still have to deal with “disclosure and
information overload”, clearly all companies now have available an
increasing range of “best in class” disclosures they can seek to emulate
or apply to their unique situation, which hopefully will reduce the burden
and challenge for their investors of reviewing these disclosures and
voting thoughtfully.
2.
Investor reliance on third party proxy advisors such as ISS concerns
companies, as they feel this one organization can unilaterally exercise an
effective veto over a range of corporate actions.
In our experience,
many companies overestimate the degree of proxy advisor influence over
their shareholder base. While it is true that the majority of large
institutional investors subscribe to one or multiple proxy advisory
services, only a minority of these automatically follow their vote
recommendations. Because many other investors arrive at the same voting
decisions through their in-house guidelines and processes, it’s easy – but
often wrong – to blame it all on the proxy advisor. Still, for some
companies, ISS and Glass-Lewis’ recommendations can determine whether
certain proposals pass or fail. In an effort to minimize proxy advisor
influence, each year more companies are initiating engagement efforts with
their top investors, developing relationships on the governance and proxy
voting side of the aisle (which in the case of indexed investors is the
only side of the aisle). They are doing this OUTSIDE of proxy season,
when the governance and voting people have more time to speak and meet
with them. This advanced timing also permits companies to incorporate
some of the intelligence they have gained on investor hot button
governance and voting issues into their proxy planning and drafting
process. Plus, companies that have developed relationships prior to the
proxy season, may be more likely to have their calls answered when they
need to discuss an issue during the height of proxy season.
3.
Annual shareholder meetings are losing their meaning and importance.
Many of us
have attended the “five minute” annual meeting, in which little or no
discussion – or voting – took place. In response, some companies are
considering abandoning the traditional meeting, and conducting “virtual”
meetings. You recently covered this topic quite well, including the piece
by Jim Kristie of Directors & Boards magazine, “How to Fix the Annual
Meeting” in which he collected a number of useful suggestions from various
thought leaders. My response to Jim’s request for “fixes” was: It’s not
whether the meeting is “virtual” or not. Is it “virtuous” is the question.
Elements of “virtuous” meetings — which technology can assist with —
include: 1) expanding the dialogue in advance of the meeting, identifying
and answering the real questions investors have, and 2) expanding the
reach and participation of meetings via technology, in addition to the
traditional “in person – whites of their eyeballs” meeting. In this
environment, trying to take away a long-standing (if not consistently
utilized) shareholder “right,” to attend the annual meeting in person, ask
questions of senior management and the board, and both hear their
responses and observe their reactions, is swimming against the tide. As
for “cost,” physical meetings need not be so expensive, if conducted at
company facilities, with a regularly-scheduled board meeting proceeding
the shareholder meeting (as many companies do). The greater “cost” will
be if the current crisis of confidence and trust is not addressed. Open,
accessible shareholder meetings — in which outside directors, rather than
sitting mute either on stage or in the front row, actively participate and
“come alive” (beyond their two-dimensional proxy statement blurbs) — are
one vehicle that can be used to greater benefit toward this end. The
Directors & Boards collection of suggestions, including mine, can be
viewed here,
and the full feature section on "Fixing the Annual Meeting" can be viewed
here.
As you can see, US
companies increasingly are making efforts to accomplish many of the
objectives of the Fifth Call, but through less dramatic yet perhaps more
effective means. Undoubtedly a few pioneering companies will decide to
conduct “Fifth Calls”. However, those that do likely will already have
put in place some of the less flashy, incremental steps discussed above,
which paradoxically might make their “Fifth Call” about as exciting and
enlightening as the “Five Minute Meeting”. It would be a shame if “having
or not having a Fifth Call” becomes yet another box-ticking exercise.
Ron
Schneider
Senior Vice President
Phoenix Advisory Partners
110 Wall Street, 27th floor
New York, NY 10005
212-493-3914
rschneider@phoenixadvisorypartners.com
www.phoenixadvisorypartners.com |