By Dominic Jones | Published: August 15, 2008 | Printer version
| Comment |

Despite poor retail vote, SEC may relax E-proxy deadline

http://www.irwebreport.com/daily/2008/08/15/despite-poor-retail-vote-sec-may-relax-e-proxy-deadline/#comment-23321

DESPITE a dramatic drop in individual investor participation at
companies using the new E-proxy process for their annual meetings, the
US Securities and Exchange Commission (SEC) is studying “rulemaking
refinements” that could make it easier for more firms to use the model.

Introduced little over one year ago, the E-proxy process allows
company investor relations departments to send a bland notice to
investors telling them how to order company reports to be mailed to
them, or where they can find clunky online versions on the web.

However, retail investors have understandably failed to respond to the new model, leading to a dramatic 73% falloff in the number of retail accounts voting or receiving essential information about their investments.

40-day deadline could be relaxed

But the wholesale lack of retail investor participation does not
appear to be a major cause for concern at the SEC or the companies it
regulates. The SEC’s director of corporation finance John White
this week revealed that the SEC may relax the deadline for notices to
be mailed to shareholders, which would make it easier for more companies to use the E-proxy process.

Currently, the rules require companies to mail notices to
shareholders 40 days in advance of the annual meeting date. This
provision has prevented many companies from using the notice-only
approach because they aren’t able to prepare their materials so far in
advance.

But in a speech on Monday at an American Bar Association meeting in New York, White said the 40-day requirement was designed to allow companies to send a second mailing
10 days later that included the proxy card, which is not included with
the first mailing. In practice, however, few companies have done a
second mailing. One that did — Microsoft — has reported that it had little impact on improving turnout.

White said his division was “definitely open to hearing your
experiences here and determining if there is something that can be done
to address [the 40-day deadline].”

Big bucks, high quorums, little worry

The SEC’s apparent lack of concern about poor retail shareholder participation may be because it has had virtually no impact on companies being able to reach quorums for their meetings. Companies using the model achieved average quorums of 86% this year.

The high quorums are a result of most company stock being held by
big institutional investors who are obliged to vote their shares.
Brokerage firms also can cast votes on routine matters even if their
clients have not instructed them to do so, including in director
elections.

Another reason no one is particularly concerned is because companies
are saving a huge amount of money. As of June 30, 653 companies have saved more than $140 million
using the notice-and-access approach, according to figures compiled by
Broadridge Financial Solutions, which processes around 70% of voting
shares in US companies.

In his speech, White said it was his “hope that we will see [retail
shareholder participation] improve as more companies use e-proxy, and
learn how to adjust its features, as investors become more familiar
with electronic voting, and as more investors desiring paper copies
make their one-time election.”

He said the SEC was also looking at allowing companies to include
“educational material” about the E-proxy process with their notices,
but that this was tricky because companies could use these mailings to
influence the vote without shareholders having access to complete
information.

Some companies have blamed the low retail vote on the SEC’s strict language requirements for the notices, and on the poor design
of notices sent to street name shareholders by Broadridge, which is
predicting a 40% adoption rate for notice-only proxy mailings in 2009,
up from 28% this year.

But White said Broadridge had made efforts to improve their notices,
“so hopefully this will not continue to be the issue that it has been
this season.”

E-proxy is about delivery. Low voting is just a symptom.

Frankly, I think everyone is missing the boat on the real problem, which is that investors are not taking delivery of their proxy materials.
Even when they go online to vote, they’re mostly not accessing the
materials before they vote. Broadridge did a study of what people did
when they went online after receiving a notice, and 90% voted without looking at the proxy materials. The SEC staff have that study, but it has never been mentioned in a speech.

All of this emphasis now by Broadridge and the SEC on increasing the
retail vote is wrongheaded. It is treating a symptom of a bigger
problem. The emphasis should be on increasing delivery
or the number of shareholders who go online to read their proxy
materials and then vote their shares with the benefit of knowing who
and what they’re voting for or against.

Uninformed investors are the worst kind, and for an investor protection agency such as the SEC to be party to a system that exacerbates investor ignorance is an outrage. I’m surprised this isn’t a big political issue yet.

Improved notices might get a few more people to go online
to vote their proxies, but they won’t do anything to improve delivery
of the proxy materials. Until companies start investing in creating
compelling and engaging online shareholder meeting campaigns and
year-round online experiences for their shareholders, e-proxy will continue to be a failure.