Firms blame Broadridge, SEC for e-proxy snafus

REPRESENTATIVES of three US companies that have used the e-Proxy default electronic delivery process in recent months have laid blame for low retail investor turnout on Broadridge Financial Solutions and the Securities and Exchange Commission (SEC).

The companies say the notices that Broadridge is sending to investors urging them to go online to view their proxy materials or order printed materials are poorly designed. And they complain that the SEC’s required text for the notices is too prescriptive and does not clearly explain the e-proxy process to investors.

The criticisms are contained in a document prepared by Broadridge entitled A Frank Discussion on Notice and Access (PDF 115KB, 6 pages). It is meant to help other companies who are currently considering a “notice only” proxy material distribution.

“Broadridge notice not very user friendly”

“The initial Notice form was difficult to understand. The hard part was that the form of Notice Broadridge used was not very user friendly. To be successful, the instructions on the Notice have to be really clear, with bigger print and easy to understand language, so that when shareholders get it, they know what to do with it,” says Helen Kaminski, Assistant General Counsel at Sara Lee, which saved $268,000 using notice and access.

Broadridge’s bland notice has come under fire by companies for not being user friendly.

Gale Smith, Director of Corporate Development at Pharmos Corp, which saved $130,000 using the new process, said if she received a Broadridge notice in the mail she would ignore it.

“The font was too small, and it did nothing to promote what Notice and Access was all about. The Notice could have been much better laid out and made more attractive with better design. It should have been more of an advertisement for the new Notice model,” she said.

Microsoft Corp’s Deputy General Counsel and Assistant Corporate Secretary John Seethoff said the SEC mandated language on the Notice “really limits what one can do with the content of the Notice.” He suggests that if the rule cannot be revised then the SEC should permit companies to take a “less formal approach” through a “no action” letter mechanism. He said Microsoft’s costs under Notice and Access were 10% to 15% of the prior year’s costs.

Better notices available from other service providers

Poor communication around the Notice and Access process has been blamed for a dramatic drop in retail investor participation rates in annual meeting votes. While the missing retail vote has not materially impacted quorums because most companies are mostly owned by institutional investors who are obliged to vote, companies are nonetheless concerned about their retail constituencies.

Dennie Kimbrough of Microsoft’s investor relations department says the software giant saw “a big difference in the retail vote.” Sara Lee’s Kaminski also reported lower retail shareholder participation despite the company’s extensive pre-planning and efforts to provide a more engaging online experience for investors.

I think it’s interesting that companies are blaming the notice of Internet availability for the low retail turnout. Bad notice design is most definitely part of the reason behind low retail participation rates. Based on my reviews of all of the corporate notice-and-access proxies this year, Broadridge’s notices are the worst designed.

It would be interesting to compare participation rates between different notice designs, such as participation rates between registered and beneficial shareholders receiving different notices. I suspect that some of the transfer agents, who have designed much better notices than Broadridge, are getting higher response rates.

This is an example of a notice of Internet availability produced by Computershare. It has a much more dominant URL and a cleaner design and larger text.

Notices just half the problem, online materials equally important

However, there is another aspect to notice-and-access that has not been fully tested and which may prove to be a bigger problem in the long term. That problem is the poor quality of the online proxy statements and annual reports that companies and vendors are producing.

The poor usability and lack of engagement opportunities currently being provided by companies is likely to result in investors trying the process a few times and then giving up because the experience is a turn-off. In other words, even if the notices are improved, that may not be enough to make e-proxy successful in the long term.

In that sense, low retail investor participation rates may actually be a blessing in disguise. Companies will have a second chance to invest in better online documents and annual meeting websites to ensure than when they do eventually attract investors to their e-proxy pages, shareholders like what they find.

Finally, I think it says something about the character of Broadridge that the company is willing to air its customers’ grievances publicly and take it on the chin. That takes some spine and they deserve kudos for it.

There may yet be hope for e-proxy.

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