Paul Hodgson: Virtual-only shareholder meetings: anathema or convenience? (Part 2)

Continuing an in-depth look at a new front in corporate-investor engagement

This is the second of a two-part series. The first is available here.

Broadridge released its latest figures for virtual annual meetings in early July. During the first six months of this year, there were 212 of them – up from 180 in the same period in 2017. Broadridge reckons they will reach 300 for the full year, a c.27% increase over 2017.
They are a small company phenomenon. In 2017, 57% were small-cap companies, 26% were mid-cap and only 17% were large-cap.
In addition, last July, ISS Analytics published its own research into online meetings. Using a more liberal definition of ‘hybrid’, meaning they had an on-line component, it recorded 203 virtual and hybrid meetings, through July in 2017. That’s a little less than Broadridge’s figures for the full year, but the remaining six months may account for the differential. Confirming Broadridge’s figures, John Roe, head of ISS Analytics, commented in an email to RI that a lot of the meetings recorded last year were held by smaller companies, probably more as a cost-savings measure. ISS Analytics does not have accurate data for what it calls true hybrids, where virtual attendees have the same rights as in-person attendees, but it suspects that the numbers are far lower than its record of the more liberal definition of such meetings.
While the virtual AGM is a business opportunity for Broadridge, I wanted to know whether there were other reasons for its involvement. I spoke to Cathy Conlon, its Vice President of Issuer Strategy.
“Yes, it is a business opportunity,” she said, “but I think the main issue about virtual shareholder meetings is how do we get greater participation in the governance process and in particular retail engagement. We’ve seen, since Notice and Access, a decline in retail shareholder participation, in particular in voting on proxy ballots.”
Notice and Access was introduced by the SEC in 2007, and allowed companies, instead of sending the full package of materials out to investors – hardcopies of proxies – to just send a notice out that the material was online. Conlon noted that it led to a precipitous decline in retail participation, because the notice was nothing like the materials that shareholders had previously received.
“Institutions already weigh heavily,” she continued, “but with retail investors not voting, their voices are heard even less. I think that’s what Broadridge is most concerned about. By and large, companies have seen a decline in attendance at their annual meetings, along with the decline in voting. Virtual meetings are a way for companies to reverse that trend.” She said virtual AGMs are mostly attended by retail holders and employees.
Conlon also acknowledged that the likes of the Council of Institutional Investors (CII) and Walden and the New York retirement funds had issues with virtual meetings AGMs as they want face-to-face engagement with companies.
But she said companies have to choose how to deploy their resources: “If you only have a physical meeting, then there are obvious constraints on who can attend that meeting. Virtual meetings give retail holders an opportunity to participate in the process because it is more convenient for anyone to attend.”What tools would Broadridge recommend to companies to increase retail investor participation?
Conlon said there’s much higher participation in voting when companies send out the full proxy package rather than just a notice. Companies could brand everything more clearly “so that shareholders understand what they are receiving”.
If they do vote, both retail and institutional investors do so in advance of the AGM, said Conlon.
And she admitted that virtual meetings did not necessarily increase voting, but rather participation.
“For example, if you are an Intel shareholder and you live in New York the likelihood of you attending the annual meeting is very small.” Intel is based in California.
But what about the lack of personal interaction? Conlon said shareholders can submit questions and vote shares on its platform.
“Finally, there is the option to have a phone line open. So, like an earnings call, you have verbal questions coming in. We are starting see an increase in that mechanism for receiving questions. We see that as best practice, having shareholders be able to verbalise their questions if they choose to.”
“When shareholders only have the option to type in questions in the text box, the form and tone of the question may be missed. It’s a low percentage of companies that allow verbal questions, but we are seeing an increase and we are hoping that trend continues.” So far, only 10% of companies allowed live phone in questions in 2017, though the figure has risen in the latest year. On the other hand, 98% allow questions to be submitted via an internet page. That latter statistic, of course, begs the question: which companies are in the 2% that do not allow any questions to be submitted at all?
Conlon was clear that having to validate yourself as a shareholder online in order to attend a virtual meeting was no different from having to prove your shareholding at a physical meeting. It was not an additional barrier, she said, and was probably easier. In addition, there was no need to ‘re-validate’ yourself in order to ask a question. “When shareholders receive proxy materials they get something called a control number which is the unique identifier for that meeting,” she explained. “When a shareholder goes to a physical meeting, they have to have a legal proxy that entitles them to go to the meeting.” Broadridge research also notes that almost three-quarters of companies allow non-shareholders to participate, to listen to the meeting, to hear the dialogue, to see the presentations.
Most importantly, I asked Conlon about the potential for companies to censor shareholder participation, especially from proponents. She said that if a phone line is the mechanism by which shareholders and proponents can be invited into the meeting to speak it should be easier for the proponent to participate. In addition, the proposal will be heard by a broader audience, including the virtual attendees. The same would be true of questions asked. However, she admitted, “When a company only has the textbox function, a shareholder can type in a question, but only management sees that question. Companies can screen the questions before they are heard by the rest of the shareholders, and that’s a very specific complaint that people have.”

She described a capability that Broadridge had built for questions to be shown automatically to everybody, but also noted that this was unpopular with companies, which wanted to “make sure that questions were appropriate before they were presented to the meeting”. “We are considering alternatives as to how we can make that automatic display of questions happen,” she said. “But it’s a tricky issue and we are trying to strike a balance; our proposal is that companies use the phone line as the mechanism to ensure that [censorship is not used].”
I asked her about the shareholder resolutions at Comcast and ConocoPhillips, one unsuccessful, the other successful, and she said that clients had been experiencing some pushback from a “small but vocal minority of investors” that wanted companies to retain physical meetings.“The ideal world is a hybrid meeting, but the practical reality of that is more difficult,” she said.
While I am not necessarily a convert to virtual meetings, I do see their positive attributes. If we see a growing number of such meetings with controversial items on the proxy, and there is no obstruction to contributions from shareholders and they are satisfied that they have been able to have their say, we are likely to see less resistance to them. After all, no one is proposing that analyst calls are conducted in-person, and there are plenty of awkward questions asked there… though usually if a phone line is open.