Ever since ownership and management diverged, owners have met with those to whom they entrust their business. They do so at least annually to learn how the business is doing, to communicate, and to exercise their rights as owners. Last year United Natural Foods, one of the companies in my portfolio, announced they were breaking from this tradition of meeting face to face with owners. Instead, they held a virtual-only meeting on December 16, 2010. Will they do it again? Not if shareowners protest. We expect an announcement in late October or early November.
Four centuries ago, Isaac Le Maire’s submitted the first recorded expression of shareowner advocacy at a publicly traded corporation. The corporation was the Dutch East India Company. His concerns are familiar:
How badly the company’s assets are being managed, and how every day needless and unnecessary expenses are being made, of great interest and to the detriment of shareholders.
For a century following the founding of the United States, corporations tended to be closely held. A handful of owners might wield a controlling interest—men who knew each other socially and professionally. They would elect themselves or trusted colleagues to officer positions. When owners divided into factions, annual meetings could be dramatic contests for control.
As early as the 1950s, shareowner activist Lewis Gilbert envisioned accessible and democratically conducted meetings, “televised from coast to coast through a closed circuit.” However, Gilbert was suspicious of management manipulating even regular live meetings. For example, he opposed the movement to require written questions:
Independent owners will not tolerate a meeting entirely confined to written questions… anyone can see that when questions are written and submitted in advance it encourages the suspicion that only planted questions are answered while the rest are ignored.
Gilbert not only wanted voting results announced, he wanted reports to include questions and answers, who asked and answered each. Every year he and his brother published an annual report on shareowner meeting that went into that exact kind of detail, including which CEOs cut meetings short so they could get to the horse races.
Gilbert reminds us that rules are “not self-enforcing.” In the area of virtual shareowner meetings, protections are practically nonexistent. While Gilbert would often go to meetings with hundreds of unsolicited proxies in his pocket and could make motions from the floor, today’s shareowners rarely assign proxies to like-minded shareowners who attend annual meetings and advance notification requirements have largely prevented such meetings from being deliberative in nature.
Annual meetings are often poorly attended. Analysts and institutional investors can get more information in a phone call. Retail investors are generally apathetic, thinking their vote cannot have an impact, meetings are too far away and they don’t have the time of money required to do or obtain the research necessary to properly analyze the issues. Additionally, outcomes are generally determined by proxy votes submitted before meeting take place.
Although now far removed from being the deliberative bodies they once were during Lewis Gilbert’s heydays, views expressed at a meeting by minority shareowners can still change the course of corporate policy, often due to reputational concerns.
While virtual meetings hold great promise, they are even more prone to manipulation than regular annual meetings. For the current time, I favor hybrid meetings. Let shareowners join in from their computers but let them join in to a real live meeting, not a management show.
Under Delaware General Corporation Law, section 211, enacted in 2000, a company’s Board of Directors has the “sole discretion” to conduct an electronic-only meeting – but must consider its fiduciary duties in making this determination. The main provisions of Delaware law pertaining to virtual-only meetings are as follows:
- the corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder,
- the corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and
- if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the corporation.
Participation under Delaware law simply means being able to listen. That’s not good enough. Before we move to virtual only meetings, we need to develop a set of “best practices.” Before we can do that, we need to have more experience with the hybrid meetings favored by most shareowners, including the Council of Institutional Investors, whose Corporate Governance Policies include the following:
Companies should hold shareowner meetings by remote communication (so-called “virtual” meetings) only as a supplement to traditional in-person shareowner meetings, not as a substitute.
Companies incorporating virtual technology into their shareowner meeting should use it as a tool for broadening, not limiting, shareowner meeting participation. With this objective in mind, a virtual option, if used, should facilitate the opportunity for remote attendees to participate in the meeting to the same degree as in-person attendees.
In Denmark public companies need a voting majority of 2/3 and a quorum of 2/3 at the specific AGM in order to approve the future use of virtual only meetings. Wouldn’t it be nice if United Natural Foods asked its shareowners first, before going virtual only? As one shareowner, I would have said “no.”
The system Broadridge offers and which was used by UNFI allows users to type in questions on the meeting page and to call in during the Q&A period but it hasn’t been without problems. See Broadridge Smokes Their Own Dope, ProxyExchange.org, 11/18/2011. Even their own meeting wasn’t pretty and users experienced several glitches.
One note to shareowner activists with pending proposals; SEC Rule 14a-8(h)(2) provides that
If the company holds it shareholder meeting in whole or in part via electronic media, and the company permits you or your representative to present your proposal via such media, then you may appear through electronic media rather than traveling to the meeting to appear in person.
To date, only a handful of corporations have experimented with virtual-only participation at their annual meetings. Nearly all have used Broadridge’s virtual meeting service because they can authenticate shareowners but their vendor’s remote meeting software doesn’t appear to be designed for corporate annual meetings. We would benefit by competition.
Lewis Gilbert and his brother John used to publish an annual report with as many as 200 pages reviewing annual meetings in a way similar to critics reviewing the theater. The Gilberts named names, gave time and place to who said what, both overtly and in tone of voice. Today, no one is regularly attending shareowner meetings and providing such reports, even though internet blogs, Facebook and Twitter would make reporting and distribution much easier. Archiving a video record of meetings on the internet, minutes, proposal presented, questions and answers would facilitate evaluation of such meetings and might lead to their improvement. Let’s start with hybrid meetings.
In California government, rulemaking is governed by the Administrative Procedure Act (APA). Similar to the advance notice requirements of corporations, the APA generally requires a 45 day public notice of proposed rules. One provision is worth borrowing:
A public hearing shall be held if, no later than 15 days prior to the close of the written comment period, an interested person or his or her duly authorized representative submits in writing to the state agency, a request to hold a public hearing.
Perhaps corporations cannot move so quickly, in this instance, as governments. Perhaps something more like 30, 60, or even 90 days notice should be required. At the very least, I will be expressing my opnion to UNFI regarding their move to a virtual-only meeting last year and asking them not to repeat their mistake.
Please consider joining me in writing to [email protected]. Tell them as an individual shareowner, you are in agreement with the Council of Institutional Investors a nonprofit association of pension funds and employee benefit funds, foundations and endowments with combined assets that exceed $3 trillion that virtual-only meetings are not ready for prime time. Ask that they do not make the same mistake two years in a row. Please refrain from holding a virtual-only meeting; make it a hybrid meeting.
Last year when Intel announced plans to hold a virtual-only meeting, members of the United States Proxy Exchange convinced them to change course and hold a hybrid (both live and virtual) meeting instead. We organized a letter writing campaign to protest Symantec’s virtual-only meeting. When that attracted national media attention, Symantec promised to hold a hybrid meeting this year. We can do the same at UNFI with your support.