Virtual-Only Meetings: The Nuclear Option

Virtual-Only Meetings are quickly being adopted by entrenched boards who fear both adverse publicity and any attempt by shareholders, especially retail shareholders, to hold them accountable. Broadridge Financial Solutions ($BR) has a direct financial incentive to push companies toward virtual-only meetings. Although many funds and organizations oppose such meetings, no one in the opposition has a such a direct financial incentive to oppose them. 

Take Action: Vote against any all all directors serving on governance or similar committees at companies that hold virtual-only meetings. 

I have been fighting against such meetings since Delaware changed its law (Section 211) to allow them in 2000. See UNFI Locked Out ShareOwners but We Voted to Declassify the Board, Broadridge Smokes Their Own Dope and many more prior posts. 

Delaware’s law provides that shareholders must be provided “an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings.” There is no requirement that shareholders be able to raise procedural objections, ask questions or communicate with each other. Additionally, there is no requirement that shareholders be able to split their vote in a contested election, such as they can do at a physical meeting of shareholders. (Broadridge tells me they do not offer their virtual meeting service where there is a contested election.)

The SEC disallows proposals seeking to ban virtual-only meetings as ‘ordinary business.’ The only option left is the nuclear one, vote against every director on board committees recommending virtual-only meetings.  That is what I will be doing and recommend readers do the same. 

Annual meetings are the only place shareholders are likely to meet with the managers and boards of the companies they invest in, as well as with employees of those companies and with other shareowners. While most of us do not attend most meetings in-person, it is vital that they continue.

In my own recent experience, several of the shareholders that formed the core of the Committee to Rescue Reeds last year initially met at the annual shareholders meeting. Our efforts led to four out of five directors being replaced, the CEO stepping down from also occupying the Chairmanship and a 69% increase in the share price. Try getting together a group at a virtual-only meeting. You cannot even tell who else is in attendance, let alone communicate with them.

Virtual-Only Meetings: The Lie

The following paragraph is from the HP Inc. letter to stockholders included with their 2016 proxy:

If their real concern was to please their shareholders, HP could have held a hybrid meeting — allowing shareholders to attend in person or via the Internet. Don’t let them fool you, HP is locking out its shareowners to avoid embarrassing questions and accountability, not to reach out and communicate with their shareholders or to save a few dollars on coffee or a room rental.

Shareholders are not clamoring for virtual-only meetings. The Council of Institutional Investors ($3 trillion in member assets) maintains a policy favoring hybrid meetings but clearly opposes stand alone virtual 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.

Meet the Shareholders? Not at These Shareholder Meetings

That was the title of Gretchen Morgenson‘s March 31 article in the NYTimes.

Companies can use technology to be open and transparent with their stakeholders, or they can deploy it to go underground… as this year’s shareholder meeting season begins, investors are taking aim at directors whose companies use technology as a shield against accountability.

Timothy Smith, the director of environmental, social and governance share owner engagement at Walden Asset Management, made an excellent point a quoted by Morgenson. “These are not management’s meetings, they are the meetings of the owners of the company.” Virtual-only events give company officials “tremendous power over controlling, censoring and really limiting the engagement of share owners with the board and management.”

Last year, 154 companies conducted virtual-only meetings, up from 21 five years earlier, according to Broadridge…

At least half a dozen large companies have said they will join the ranks of those offering virtual-only meetings in 2017. They include Ford Motor, Alaska Air, Duke Energy, ConocoPhillips and the GEO Group, a private prison operator.

Scott M. Stringer, comptroller of New York City and overseer of city pension funds with $170 billion in assets, informed Morgenson the Comptroller’s office will recommend against the election of all directors sitting on corporate governance committees at the companies where virtual-only meetings continue.

Stringer wrote to Duke Energy criticizing their plan to have a virtual-only shareholder meeting on May 4. Duke’s Catherine Butler gave the major reason for the switch as follows: “We have a worldwide shareholder base, and we want to make sure the majority of shareholders have the ability to participate.” 

Duke Energy Protest 2016

As Morgenson noted, “Of course, a hybrid meeting would also allow Duke’s shareholders around the globe to participate.” A more likely explanation is that Duke wants to avoid embarrassing protests about shareholder resolutions on climate change or other sensitive topics. 

“Whether you own one share or one million, you can speak at a company’s annual meeting,” Mr. Stringer said. “Except now, in this interconnected world, companies are using technological tools to whittle away at investors’ rights and hide from accountability. If boards shirk this responsibility, share owners should join us in holding them accountable.”

The Council of Institutional Investors has long urged companies using virtual meetings to do so only as a supplement to in-person gatherings.

According to Gary Lutin of the Shareholder Forum, 

Hybrid meetings allow shareholders to show up and participate any way they want to. There’s no reason to make it a pure virtual meeting other than to control the communication, and if that’s the purpose, that’s not consistent with annual meeting requirements.

Morgenson went on to describe a few of the technical problems that have arisen at Virtual-Only meetings.

US companies defy investors with switch to online annual meetings

The above entitled article March 31 by Stephen Foley, a New York correspondent for the The Financial Times, included the graph at the top of this post. He identified several companies switching to virtual-only meetings this year, including the following:

• Ford
• ConocoPhillips 
• HP
• JetBlue
• Sprint
• Fitbit 
• PayPal 

Again, the lie is repeated. Ford announced it was joining “a growing list of forward-looking companies” by ending its in-person shareholder meeting. “The virtual nature of the meeting will enable us to increase shareholder accessibility, while improving meeting efficiency and reducing costs,” said Bill Ford, chairman. A hybrid meeting would allow just as many and the cost of renting a room or using one at Ford headquarters would be minimal. 

Foley writes, the shift by Duke Energy to a virtual-only meeting “was criticised by As You Sow, a shareholder group that has put a resolution on the agenda demanding information on pollution from its coal-fired power plants.” Said Danielle Fugere, president of As You Sow:

They do not want to face the folks they have harmed. Our goal is to make the board understand how important these issues are but, if you are so many voices on a webinar, you lose the impact of the message. It feels like they are running away from their shareholders.

Foley also discusses opposition from the Council of Institutional Investors. I love this quote from Ken Bertsch, executive director of CII:

If it is a non-event, and not a lot of people attend, then there is not a lot of cost. If it is an event and a lot of people attend — well, then it is an event that should be held.

Foley notes formation of a group to design a code of best practice, which includes representatives of investors such as CalSTRS and Capital Group and companies including Microsoft. While I am glad CalSTRS and others are participating, I was initially on a similar group in 2012 that felt too much like coming up with selling points for Broadridge’s service. For example, a recent post by Cooley LLP hints that if companies follow best practices, CalSTRS is somehow endorsing their use of virtual-only meetings. However, I CalSTRS is actually opposed to all virtual-only meetings and provided feedback on how to ensure a bad situation isn’t worse. 

One approach that may help to dispel that negative public perception and make virtual-only meetings less objectionable to these protesting institutional holders may be to employ the types of safeguards and best practices suggested in Guidelines for Protecting and Enhancing Online Shareholder Participation in Annual Meetings, developed by CalSTRS, the National Association of Corporate Directors, NASDAQ, the Society of Corporate Secretaries & Governance Professionals and others.

Comptroller Stringer: Virtual Only Meetings Deprive Shareowners of Important Rights, Stifle Criticism

On April 2 NYC Comptroller Scott Stringer put out the following press release:

• Since 2010, the number of companies holding virtual-only meetings has grown more than 700%
• Comptroller Stringer sending letters to more than a dozen S&P 500 companies decrying a practice designed to avoid accountability
• Under proxy guidelines proposed by Comptroller Stringer, the NYC Pension Funds would hold corporate directors accountable for virtual-only meetin

(New York, NY) — Today, New York City Comptroller Scott M. Stringer announced he was calling on more than a dozen major corporations to host in-person annual general meetings, rather than continuing to use “virtual-only” meetings. Alarmed by the rapid increase in such meetings, Comptroller Stringer said he will recommend that the New York City Pension Funds adopt a policy to vote against directors at companies that continue to hold “virtual-only” meetings.

Over the past six years, the number of corporations hosting virtual-only meetings — either online or over the phone — has grown more than 700%, rising from just 19 in 2010 to 155 last year. Virtual-only meetings deprive shareowners the fundamental right that, regardless of the number of shares they own, they can engage directly with management and directors — face-to-face — at least one-time per year.

Some companies — like Duke Energy and ConocoPhillips — are likely using online-only meetings to insulate themselves from uncomfortable interactions with concerned shareowners, while others may have moved to virtual-only meetings without realizing they are violating an important investor right.

“It’s one of the great markers of American enterprise — whether you own one share or a one million, you can speak at a company’s annual meeting. Except now, in this interconnected world, companies are using technological tools to whittle away at investors’ rights and hide from accountability. Often, they want to avoid looking shareowners in the eye — they’re treating face-to-face interaction as a nuisance instead of a duty. If boards shirk this responsibility, shareowners should join us in holding them accountable,” Comptroller Stringer said.

“Some companies are indeed using technology to boost shareowner participation, which we support. But it’s disingenuous to say virtual-only meetings broaden access — they often create barriers, rather than tear them down. It’s a sleight-of-hand – and it’s wrong, because in some cases, companies are clearly using virtual-only meetings to avoid criticism,” Comptroller Scott M. Stringer said.

The Comptroller’s Office has begun sending letters to the S&P 500 companies that hosted virtual-only meetings last year, along with companies that have announced they will host virtual-only meetings this year. The letters outline concerns with the practice, including the ability to silence investors, cherry-pick questions, and avoid protestors. The letters urged the directors to abandon the practice and embrace either traditional in-person meetings or hybrid ones, which expand access by combining in-person meetings with aspects of virtual meetings.

Companies that will receive letters from the Comptroller’s Office include:

• Alaska Air Group
• Biogen Inc.
• CA, Inc.
• Comcast Corporation
• ConocoPhillips
• Coty, Inc.
• CSRA
• Duke Energy
• Ford Motor Company
• HP, Inc.
• Illumina
• Indexx Labs
• Intel Corp.
• Intercontinental Exchange
• Newfield Exploration Company
• PayPal Holdings
• Synchrony Financial

The Comptroller also highlighted changes he has proposed to the New York City Pension Funds’ proxy voting guidelines to encourage in-person or hybrid meetings. Under the proposed guidelines, the $170 billion New York City Pension Funds would vote against directors on companies’ governance committees if they host virtual-only meetings. The pension funds’ trustees will vote on these changes in April.

To view an example of the letters sent by the Comptroller’s Office, click here.

Virtual-Only Meetings: Fund Managers Must Make Better Use AGMs

The following is from Mike Mayo, former Head of US Bank Research, to Deutsche Bank, Prudential, CSFB, the first analyst to testify on the causes of the financial crisis to the Financial Crisis Inquiry Commission (FCIC) and the only analyst to testify to Congress for the passage of the Sarbanes-Oxley act in 2002. (Mike Mayo: Closing the Bank Governance Gap)

After more than $300 billion of outflows in 2016, many active fund managers are being pressured to show the benefits of an active strategy. Funds that engage companies can positively help investment performance and brand. Comerica is a good case study.

Early last year, we upgraded Comerica on the view that its board would either improve governance, sell the bank, or replace top management. Comerica was the least optimized large regional bank with the worst stock performance among large banks with long tenured CEOs. I called each large Comerica shareholder to highlight our research, urging them to speak up if they saw a concern. These conversations were productive and I arranged to see many of them at the annual meeting if they were to attend. In the end, the experience left me both extremely gratified and extremely frustrated.

The Comerica annual meeting was extraordinary. In the end, 10 large institutional investors – mostly page 1 holders – boarded planes to attend Comerica’s annual meeting (in Dallas of all places) and stood up publicly to voice their concerns – a memorable moment for shareholder rights. Most meetings don’t draw one institutional investor, let alone ten.  One month later, Comerica announced a broad restructuring and the stock was the best performing among the 30 largest banks in 2016. Kudos to large mutual funds such as Invesco and Fiduciary who attended and spoke up (unusual for them to do so publicly) to protect the interests of the investors in their funds.