The first part of an in-depth look at Virtual-Only Shareholder Meetings, a new front in corporate-investor engagement.
Scenario 1: In-Person Shareholder Meeting
A shareholder proposal calling for the chairman’s resignation is coming up for vote at the physical annual meeting of Acme Inc.
In the packed hall, a supporter of the proposal rises to her feet and begins to describe exactly why the chairman must resign, making fulsome reference to his incompetence in negotiating the latest CEO’s pay package, dealing with the former CEO’s sexual misconduct and a botched acquisition that halved the company’s market cap.
Eventually, security is called and in the ensuing scuffle, the shareholder is concussed and has to be carried from the convention centre. Imagine the headlines…
Scenario 2: Virtual-Only Shareholder Meeting
The same proposal is up for the vote at Acme’s virtual AGM. The same investor starts to make the same points… but is silenced by the IT manager running the meeting. No headlines.
It’s so much easier to prevent dissent in the virtual meeting through censorship; it is no wonder that shareholders have their concerns. But how often do such situations arise? And how worried should they be?
Virtual-Only Shareholder Meetings: Best Practice
Whatever the concerns, the virtual meeting is here to stay. The SEC won’t allow shareholders to hold votes on outlawing them and more states are dropping laws that made them illegal, with Washington the latest in July. Also in July, Broadridge announced it had run its 1,000th virtual AGM and the numbers are increasing every year.
While the virtual meeting is not new, best practices are still evolving. The Best Practices Committee for Shareowner Participation in Virtual Annual Meetings, under the auspices of Broadridge, the major purveyor of technology for such meetings, released a guide in April this year; not without some controversy. The committee was chaired by Anne Sheehan, formerly of CalSTRS, and included representatives from public and private pension funds, company boards, the Society for Corporate Governance, the Council for Institutional Investors, the National Association for Corporate Directors and law and other firms providing proxy and other services. Interestingly, no proxy advisers were on the committee.
The opening of the report is somewhat ambivalent about virtual-only meetings, which it defines as an online meeting with no corresponding in-person meeting. Some members said that they “are an acceptable practice”, while others said that “a hybrid meeting is always preferable to a virtual-only meeting”. Hybrid meetings are defined as “an in-person, or physical, meeting which shareowners are also able to attend virtually either through an online audio or video format”.
The five principles and 12 best practices that the committee has recommended apply both to virtual-only and hybrid meetings. If adhered to, they should avert most of the concerns that shareholders have. They guarantee, among other things, meaningful engagement between directors and shareholders attending virtually and ensure equal access to all shareholders, whether they are in the room or online.
Of course, not all companies holding virtual only meetings adhere to these principles and practices, and if even one practices the kind of censorship seen in Scenario 2, that makes them unusual.
But even the publication of the best practices report was accompanied by controversy. One of the members of the best practices committee, Tim Smith of Walden Asset Management, was quick to criticise the press release that announced the report.
“The release is neither a fair nor accurate representation of the thinking of the Group nor the nuances in the report,” he said in an email about the release. “After reviewing the release, I regret to say that it has become a promotional piece for Broadridge singing the praises of Virtual-Only meetings and referring to best practices for running them,” Smith continued. “Nowhere is there even a hint in the release of the downside of VO meetings and the fact that several participants in the Study group had strong positions opposing them as the best choice for a company.”
In an interview with me, Smith said of virtual-only meetings: “Our general position, CII, AFL-CIO and New York City, is ‘it’s not a good idea, don’t do it’. But there are lots of small companies that have never had anyone come to their annual meetings, so that’s less of a concern.
“But when big companies like Intel or ConocoPhillips do it, even when they do it well, as they did, there are shareholders who have submitted shareholder resolutions, which means they should be having an in-person meeting as well. We’re not trying to be doctrinaire, it’s just that, even with best practice, it’s not the same as those shareholders being in the same room as the board and management.” Smith confirmed that, at small companies, and even large companies, without resolutions on the proxy, a virtual-only meeting was not as troublesome.
Even this report gives a set of arguments against companies moving to a virtual-only annual meeting and describes investor opposition, although it does say that opponents support technology being used to increase investor participation; a position also held by Scott Stringer, the New York City Comptroller. The CII, represented on the committee by executive director Ken Bertsch, has endorsed the use of technology as an adjunct to physical meetings, but opposes virtual-only meetings that don’t give online attendees equal access.
Available data for virtual-only and hybrid meetings is less easy to draw conclusions from. Data from ISS Analytics for the S&P 500 confirms Broadridge’s figures showing ever increasing numbers of virtual meetings. There were 2, 5, 17, 25 and 18 virtual-only meetings in, respectively, 2014, 2015, 2016, 2017 and 2018 year to date.
As John Roe, head of ISS Analytics, said in an email: “So far in 2018, we’re holding constant at about 5% of companies with virtual-only meetings. It seems that some noise, with the charge led, perhaps, by Scott Stringer’s office, is making more large companies more reluctant to make the move this year.”
That’s right, not all shareholders are happy with this development. Stringer sent letters in April 2017 to 17 companies that had held or were planning to hold virtual-only meetings, including Duke Energy, Ford and HP. The letters called on them to hold in-person meetings and threatened to vote against directors at companies that held online meetings only.
“It’s one of the great markers of American enterprise,” said Stringer in the press release announcing the campaign “— 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.”
As a result of the campaign, Stringer said in an email response to RI, “In response to our outreach, some companies have agreed to abandon an approach that denies shareowners the fundamental right to express their views and ask questions of the board in-person. However, many companies continue to ignore this right and defend the indefensible.”
In addition, the fund will be voting against the directors on the governance committee of any company that holds a virtual-only meeting. And, in a change to previous practice, beginning in 2019, Glass Lewis will generally recommend voting against governance committee members if a company is planning to hold a virtual-only shareholder meeting and it does not provide the same rights and opportunities to participate as at a physical meeting.
I wrote earlier about opposition to virtual-only meetings from shareholder resolutions. But unfortunately, the SEC allowed has allowed most companies, such as Comcast, to exclude these resolutions from their proxies on the grounds that they are ordinary business.
On the other hand, a similar resolution caused ConocoPhillips’ board to move away from virtual-only meetings, and the resolution was withdrawn before the proxy was filed. Union Pacific made the same decision, Smith told me.
Controlled companies like Comcast and others that don’t want to ‘look their shareowners in the eye’, as Stringer said, will continue to be intransigent about the issue of virtual-only meetings; more so because their disregard for shareholders is being supported by the SEC.
So there will continue to be online meetings where shareholders can look but not touch, unless threats like Stringer’s are backed up by action from both asset owners and asset managers. Except that large asset managers do not use the annual meeting as an avenue for engagement. For this reason, the rise of the virtual-only meeting may be less of a major concern to those likely to swing a vote.
Publisher’s Note: This post originally appeared in Responsible Investor. Subscribe. I added headings, reformatted slightly and added a graphic that shows the dramatic rise in virtual-only meetings beyond the S&P 500 numbers quoted by Hodgson.