UNFI Locked Out ShareOwners but We Voted to Declassify the Board: Company Now Seeks Feedback on Meeting Format

I attended a virtual-only meeting of United Natural Foods, Inc. yesterday and was pleased that a majority of shares were voted in favor of my proposal to declassify the board. That, combined with a move to majority vote requirements for directors a few years ago, helps move UNFI ($UNFI) into the center of the pack with regard to corporate governance. However, I am very disappointed with the lockout style annual meeting. They said they are open to change. Of course, that may depend on shareowners providing feedback. I hope you will join me in requesting changes. I tell you how at the end of this post and I make it a painless cut and paste exercise.  

Of course, I would like to UNFI take a leadership role instead, as they have with certain social and environmental issues, but center of the pack is much better than lagging neat the tail end. UNFI could still do better with regard to independence of our board and in how our CEO is paid, among other issues. You should be able to replay the meeting here for the next year.

In general, the balance sheet looks good. I think they said net sales were up 15%. From other sources it appears that for the three months ended 27 October 2012, United Natural Foods, Inc. revenues increased 16% to $1.41B. Net income increased 42% to $21.5M… good performance from a company with a great vision:

To be the unparalleled leader in the distribution, development and marketing of natural and organic, wellness, and specialty food products by fulfilling the highest standards for quality, consistency, sustainability, product assortments, dependability, value-added support services and integrity in our business and personal relationships.

My biggest disappointment with the meeting was the feeling that shareowners were virtually locked out. My sense was that our management and our board see the shareowners meeting as a mere formality, to be rushed through. Interaction with shareowners was minimal and there was no opportunity for shareowners to interact with each other, with management or with the board… other than our ability to type in a single question each.

Last year I initially participated in the “Best Practices Working Group for Online Shareholder Participation in Annual Meetings.” I was a bit skeptical from the start, since the group was facilitated by Broadridge, the largest contractor for facilitating annual shareowner meetings. I didn’t see how any report issued by the group could be objective but I thought it was better to get my ideas out there than to not be heard form. As meetings progressed, it was clear to me they were on Broadridge’s schedule, not mine, and that they were the main drivers.

I dropped out because I didn’t want to lend my name to a report that didn’t speak out strongly against locking out shareowners with virtual-only meetings. Even if the report carried dissenting opinions, it was clear the main use would be as a marketing tool for Broadridge and they have an economic incentive to provide whatever service management at any given company requests.

While the report issued (Guidelines for Protecting and Enhancing Online Shareholder Participation in Annual Meetings) contains valuable considerations and best practices, virtual-only (lockout) meetings were too frequently clumped in the final report together with hybrid meetings, in which shareowners can participate either in person or through the internet. Indeed, a couple of paragraphs from the opening of the report demonstrate that tendency to clump lockout meetings with hybrid meetings.

Advocates of virtual-only and hybrid meetings of shareholders believe, in general: (i) that they are a highly efficient way to enable shareholders to actively participate in shareholder meetings without incurring the expense and inconvenience of traveling to the meeting site, (ii) that new technologies assure effective communication and, importantly, (iii) that virtual meetings of shareholders result in higher levels of shareholder participation.

Critics of virtual-only and hybrid meetings of shareholders, on the other hand, generally assert (i) that virtual-only participation is a poor substitute for “looking the board in the eye,” (ii) that the opportunity to address corporate management and directors in person is an important shareholder right and (iii) that the current Internet communication technology is not a good replacement for a physical meeting.

Those who bothered to read the entire report learned protections offered by many states are minimal and that the Council of Institutional Investors ($3 trillion in member assets) maintains a policy favoring hybrid meetings but clearly opposing virtual-only meetings:

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.

That said, those who continued did put together a useful list of recommendations. As I look at that list, I must conclude our company failed many of them, such as the following:

  • Adopt principles for online participation in shareholder meetings, just as they would for an in-person meeting. Publish those principles for online participation in shareholder meetings in a reasonable period of time in advance of, and during, the meeting. I didn’t see any such principles posted, nor as a shareowner with a proposal on the agenda was I told anything other than that I or my representative would be called upon several minutes into the meeting.
  • Establish reasonable procedures to allow anyone to attend an online annual meeting and to determine whether non-shareholders may be permitted to participate on a view/listen only basis. We all appeared to be in a listen only basis until pre-verified presenters were acknowledged. And I mean listen only. There was no information provided visually… no accomplishments, no financials, nothing.
  • Establish reasonable guidelines for questions from shareholders intending to participate online in shareholder meetings. Specific considerations when establishing guidelines for questions from shareholders include:
    • Procedures to post all questions received in advance of the meeting and to allow investors to communicate before the meeting to indicate they wish to ask a question or make a statement. Nothing like that. I didn’t see anyway to ask questions in advance of the meeting or any mechanism to communicate with other shareowners. There was no communication directly from shareowners other than my representative, John Chevedden, and from Tim Smith, Vice President of Walden Asset Management a division of Boston Trust & Investment Management Company, who apparently had arranged to make a statement in advance. Tim was very eloquent in supporting the board declassification proposal and in objecting to the virtual-only meeting. He struck a very diplomatic tone of praising the company for environmental leadership, informing listeners of the UN’s PRI program, gently criticizing UNFI for the appearance of hiding through use of a virtual meeting format. They cut him off mid-sentence a little more than three minutes into his very respectful and thoughtful remarks. It sure felt like censorship to me. What would the harm be in listening for another 15 seconds? They seemed more interested in holding the meeting to less than a half hour than to actually listening to one of their largest shareowners.
    • Specific and reasonable time guidelines for questions asked of management (e.g., five minutes for shareholders presenting proposals and two minutes for general questions). As I recall, they allowed Chevedden four minutes and wanted to limit Smith to two. Although they were told of these time limits in advance of the meeting, I think UNFI management should have demonstrated more flexibility. The purpose of time limits should be to give everyone an opportunity to participate, not to limit one or two people from giving voice for the many.
    • Specific and reasonable guidelines for the display of questions and answers. Some shareholders have expressed concerns regarding the potential for manipulation by companies with respect to the way they might filter, organize, group and display questions and answers. Acceptable practices for addressing these concerns could include:
      • Displaying all reasonable questions asked during a meeting (i.e., questions that are malicious or frivolous in nature can be excluded at the discretion of the company, as can duplicative questions) No questions were displayed.
      • Organizing and answering questions based on groupings of related questions. Shareowners were limited to only one question each, this may not have been an issue. We were told of only two questions.
      • Establishing reasonable procedures for shareholders to ask questions via telephone; and, in the future, companies should consider videoconferencing access as technological advances are made and costs decline. UNFI management was in control. There were no questions by phone or visual presentations of any kind.
      • Establishing procedures for posting all questions and answers after the meeting, including the specifics related to each question (e.g., how many questions were received on a specific matter). Posting Q&A after the meeting doesn’t appear to have been considered, although they did say the recording would be available for a year.
  • Opening web lines and telephone lines in advance of the meeting to allow shareholders to test their access and be sure they will be able to participate in the meeting. I was told the call-in number would be available 30 minutes in advance. Both the web interface and the phone number were live only ten minutes in advance of the meeting… hardly time enough to shift to another browser if technical difficulties presented. 

As indicated above, shareowners were limited to typing one question each. We were told, but were unable to verify, that only two questions were raised. One asked UNFI to respond to a report on labor issues. I later found out the question came from Dan Willett, with the Capital Strategies Department of the Teamsters. He typed in the following question for board candidate Peter Roy:

I am Dan Willett, representing the Teamster Affiliates Pension Plan, owners of 7300 shares.  The International Labor Rights Forum (ILRF) issued a report on our Company’s human resources practices in the western U.S. last month.  It includes some very damaging revelations of managers threatening to kill employees and intimidating employees.

These outrageous practices threaten to destroy our Company’s brand as socially responsible.  In preparing the report, the ILRF asked our Company for a response and information and our Company refused to respond.  Ramifications of these practices are already occurring, as employees in Auburn, Washington began an Unfair Labor Practices strike this week.

As I recall, CEO Spinner summarized the question poorly and responded only in part, alleging harassment of employees by union members. I don’t recall him providing or committing to providing any real response to the union report. It was another example of hiding behind the virtual meeting format.

Jeremy Blasi, an investigator for the International Labor Rights Forum (ILRF) conducted a recently released investigatory report “Freedom of Association at United Natural Foods Inc.,” which described in detail alleged violations of international labor rights including threats, intimidation and discrimination at both a warehouse in California where workers attempted to form a union as well as a union-represented Auburn, Wash., facility. I wouldn’t have expected a detailed discussion of such issues at the annual meeting but some reassurance that UNFI would fully analyze the report would have been nice.

The second question was mine. I essentially asked why UNFI was using a virtual-only meeting to lockout shareowners. Joseph Traficanti, senior vice president, general counsel and chief compliance officer, answered saying their intention was to be more inclusive, saving shareowners the time and cost of travel. He indicated UNFI is “open” to reasonable suggestions from shareowners and gave out his e-mail address, jtraficanti@unfi.com, seeking feedback. Here’s my suggestion, send an e-mail to mailto:jtraficanti@unfi.com with “Annual Meeting Format” in the subject line. Feel free to embellish:

Dear Mr. Traficanti,

This is in response to your call for suggestions on how to conduct next year’s annual meeting of UNFI shareowners. I recommend that UNFI move to a hybrid format, so that shareowners can attend either in-person or virtually. UNFI should also incorporate the best practices outlined in the Guidelines for Protecting and Enhancing Online Shareholder Participation in Annual Meetings.

Since Tim Smith, representing one of UNFI’s larger shareowners, participated in creating those Guidelines, I suggest you run a draft policy by him. You should also consult with the Council of Institutional Investors, Broadridge and other parties who have  researched these issues. As a concerned long-term shareowner, I would also welcome the opportunity to provide additional feedback on any such draft. Thank you for your consideration.

I’m certainly no fan of Broadridge promoting virtual meetings because their pitch to companies does little to acknowledge the preference of shareowners for hybrid meetings. I do, however, favor broader acceptance and use of their Shareholder Forum product. Here’s their pitch:

Enhance your shareholders’ experience before your virtual meeting—and throughout the year—with Shareholder Forum, a controlled online venue for communicating with validated shareholders. Shareholders can ask questions, vote and answer surveys in an interactive forum dedicated exclusively to your company. Now your executive team and board of directors can gather ideas, receive important feedback and make corporate governance more transparent—all without any disruption to your existing processes.

Benefits to you and your shareholders include:

  • Generate higher levels of shareholder interaction, engagement and understanding
  • Improve the shareholder’s ability to communicate directly with your company
  • Provide executive management and board of directors with valuable insights
  • Improve your  investor outreach efforts by increasing the volume and type of shareholders involved, including retail shareholders

There is certainly potential there to create a dialogue. However, they haven’t attracted many companies to date. Broadridge needs to do a better job of integrating information streams and other social media type features into their forums before I can ever see them taking off. Disclosure: Broadridge is also part of my portfolio.


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