Proxy Voting Drops Dramatically Online

Proxy Voting Drops Dramatically Online

February 8, 2010
Chris Kentouris

In an era when Twitter, Facebook and other social networks allow individuals to learn about each other and communicate with the click of a button, you might think retail investors would just love to throw away their bulky annual reports and paper-based ballots. Now, they can just receive proxy materials over the Internet and vote on corporate agendas online, by clicking on choices. Issuers can also save lots of money on printing and postage.

But shareholders have not shown a love of the electron, despite the Securities and Exchange Commission's effort to encourage online voting. Participation in corporate elections on the Internet is roughly a fifth of what it has been on paper, in the experience of issuers which employ the SEC's notice and access rule for electronic voting.

Oh, the cost savings have been realized. A study conducted by Broadridge Financial showed that the 653 issuers who took advantage of the SEC's notice and access rule saved $143 million, net of fees, in 2008, in moving from paper to electrons. For 2009, the 1,363 issuers that used notice and access saved $239 million. Broadridge Financial is the world's largest proxy distribution and electronic voting firm.

But shareholder adoption was not realized. In fact, voting by retail investors fell dramatically. The Broadridge study showed that only 4 percent of retail shareholders who obtained their proxy information through the notice and access rule voted on shareholder matters. That compared to 20 percent who voted when they received materials and ballots through the mail.

Adopted in 2007, the SEC's notice and access rule allows investors to receive a notice in the mail on where they could go online to find annual reports and other proxy materials. Once there, they could cast their votes for or against corporate agendas, from a keyboard. The rule was part and parcel of a broader ongoing SEC initiative to encourage retail participation in corporate affairs.

"It ended up being a tradeoff," says Colin Diamond, a partner at the law firm of White & Case in New York. "While some issuers did save plenty of money, some investors decided they didn't want to receive information electronically. Yet others may have been willing to vote online but were confused about how to do so."

Even the economic savings to issuers really weren't that impressive, according to the trade group National Investor Relations Institute. A survey it conducted in 2009 showed that in some cases, lower print and postage costs were offset by higher fees paid to service providers. NIRI never defined just who the service providers were, but several corporations contacted by Securities Industry News said they paid additional fees to proxy solicitors to ensure they could get sufficient participation from retail investors to achieve a quorum.

Even companies which might have been brave enough to risk fewer votes from retail investors using the notice and access rule might not do so this proxy season. That is because the New York Stock Exchange in January eliminated Rule 452 which allowed brokers to vote in director elections when their clients didn't. Since broker-dealers often voted in favor of management policies, corporations were pretty much guaranteed the support of even those shareholders who didn't vote themselves.

Concerned about lower participation, the SEC has now proposed some tweaks to notice and access which it hopes will allow investors to understand the process more clearly. Issuers who want to deliver shareholder meeting materials electronically can use their own language, instead of the SEC's legalistic boilerplate terminology, in the notices mailed to investors about where to find the information. The SEC also says that issuers can include with the notice an explanation of how the notice and access model works.

But some proxy experts think such changes won't make much difference. Ken Altman, president of the Altman Group, a New York proxy solicitation firm, recommends that the SEC allow issuers to send proxy cards and business reply envelopes that allow paper voting, along with the notices that direct them to detailed information and voting pages online.

"Most retail investors are accustomed to having a one-step process for participating in annual meetings and director votes," he says. "Now they are being exposed to the notice-and-access model without an adequate education program or simple explanation as to why the more time consuming notice-and-access process is in their interest."

While Altman's recommendation is also endorsed by NIRI and the Washington, D.C.-based Shareholder Communications Coalition, an umbrella organization of issuers and transfer agents, industry executives close to the SEC say the regulator is against linking the proxy notice with the ballot.

Altman and NIRI also want the SEC to start an investor education program of sorts to help retail shareholders understand the importance of having their voices heard. And Altman believes that broker dealers and banks should include educational material on the proxy voting process in monthly account statements mailed to customers.

Other proxy experts also say that investors need to be better educated on the issues they are voting for. Even the best technology won't be enough motivation, according to Steven Schlegel, vice president of Moxy Vote in West Chester, Pa., a startup online voting service for retail investors.

Launched late last year, Moxy Vote has been funded by a $2 million investment from TFS Capital, a West Chester investment company run by brothers Kevin and Rich Gates.

Moxy Vote eventually hopes to earn revenues from advertising as well as from issuers and "advocates"-shareholder groups who make their opinions known on Moxy Vote's website

Investors can vote on Moxy Vote's website after punching in a code from the proxy card they received in the mail. Or investors can provide their brokerage account numbers to Moxy Vote and receive an email notification of an incoming ballot from a company in his or her portfolio. Schlegel declined to comment on whose technology Moxy Vote used or name its voting tabulation agent is but industry experts say Moxy Vote is working with Broadridge.

While endorsing the SECs' proposed changes to its notice and access rule, Chuck Callan, senior vice president of regulatory affairs for Broadridge, says that companies also need to use social networking technologies to hold two-way communications with their retail investors.

Broadridge offers a virtual shareholder meeting service which allows investors to attend a meeting on the Internet and vote in real time as though they were on the floor of the actual meeting. The firm also provides an "investor network" which allows shareholders to communicate amongst themselves through broker-dealer websites.

While Callan says about a dozen firms have taken advantage of its new services, it cannot be determined just how extensive their reach was with retail investors.