Broadridge Financial Solutions (BR) essentially monopolizes the proxy processing business in North America, providing such services to 90% of public corporations and mutual funds in the region. Monopolies aren’t necessarily bad. Some products and services are most efficiently delivered by a single provider. But good monopolies are regulated monopolies, and Broadridge isn’t regulated. Whenever the SEC updates rules governing the proxy process, they usually have to ask Broadridge how things are actually done. It’s kind of pathetic.
By choosing how to do things, Broadridge makes de facto rules. A perfect example is Voting Instruction Forms (VIFs). These look and feel like proxy cards, but they are not. Broadridge mails out VIFs with shareowners’ proxy materials in lieu of proxy cards. The way Broadridge explains it, shareowners fill out VIFs to indicate how they want their proxies voted, which is not the same thing as filling out a proxy. Got that? The practical significance of VIFs is that they allow corporations to circumvent the SEC’s rules governing the content and layout of proxy cards. A proxy card is essentially a ballot, so those rules are important for ensuring fair corporate elections. The rules apply to proxy cards but VIFs aren’t proxy cards. In May 2009, the United States Proxy Exchange (USPX) joined Jim McRitchie in filing a request for rulemaking with the SEC. This asked the Commission to address abuses related to VIFs. To date, the Commission has not acted on the request.
No legislation ever created VIFs. We are not aware that the SEC promulgated their use. As far as anyone can tell, Broadridge quietly created them. Whenever the SEC found out, they didn’t stop the practice. De facto, Broadridge makes the rules.
VIFs are identified with 12-digit control numbers. Broadridge issues and manages the control numbers. And they are using those control numbers to offer a host of on-line products. Want to submit your VIF online? Go to Broadridge’s proxyvote.com website, and enter your control number. Want to attend a virtual annual meeting? Go to Broadridge’s virtualshareholdermeeting.com website, and enter your control number. Broadridge is poised to monopolize such on-line services for the simple reason they own the control numbers, and would-be competitors don’t. In 2011, Broadridge plans to release phone apps that will allow people to submit VIFs on the go. You will just tap on a Broadridge icon and type in your control number.
Shareowners’ response to Broadridge’s digital services have mostly been negative. Proxyvote.com has attracted millions of users, and it is very convenient. As with all things Broadridge, transparency is an issue. You can’t know if your votes actually make it into the totals. Worse, shareowners noticed that items left unvoted were being automatically filled in as votes according to management recommendations. That little feature was what motivated McRitchie’s request for rulemaking.
The USPX has reported on the various ways Broadridge’s virtual annual meeting service disenfranchises. See in particular reports on Symantec’s virtual meeting in September and Broadridge’s own virtual annual meeting last month.
Perhaps the biggest flop among Broadridge’s forays into the digital realm has been their Investor Network, which allows corporations to pay Broadridge between $20,000 and $50,000 a year to host an on-line forum for their shareowners. In January 2008, the SEC adopted a new Rule 14a-17 and amended Rule 14a-2 to
… facilitate the use of electronic shareholder forums by public companies and their shareholders.
With the Investor Network, Broadridge tried to capitalize on this opportunity. Their CEO, Richard Daly, likes to boast that, on their forums,
… we can know with complete confidence that the person whose post you are reading or with whom you are communicating is an actual investor.
I am not sure why that is important, as shareowner forums would benefit from the participation of journalists, regulators, employees or shareowner activists. But Broadridge controls the control numbers, so they can guarantee it.
Few corporations have adopted the Investor Network, and those who have generally did so to augment a Broadridge-hosted virtual annual meeting. Shareowners have mostly given the service a pass. With the initiative floundering, Broadridge is shifting to a “Plan B.” Dominic Jones of IR Web Report broke the news that Daly is personally lobbying the SEC commissioners to mandate that all public corporations offer shareowner forums. Daly anticipated this course two years ago in an August 2008 conference call:
The activity here is really going to be driven by, is the SEC going to deem that this is something that shareholders need to have the right to. And if that was the case, then I can’t imagine it getting done any other way than through the plumbing we have in place, and again that’s a chasm between us and any one else, no one else is close to connecting every investor to every public company.
As things already stand, anyone can implement a shareowners forum. There is no need to force corporations to do so. There is no reason to mandate that such forums offer features that only Broadridge is poised to provide. That would only postpone the day when shareowner forums actually take off.
If Daly persuades the SEC to mandate his monopolistic vision, it will be time for shareowners to petition the Federal Trade Commission for some antitrust enforcement. It may already be time.