How to fix e-proxy

A WEEK ago, I called the US Securities and Exchange Commission’s (SEC) notice-and-access process for delivering annual meeting materials on the web “one gigantic flop from an investor protection perspective.”

I think it’s worth beating that drum a little louder in light of the latest statistics from Broadridge Financial Solutions showing a sharp drop in retail shareholder participation in notice-and-access meetings.

As reported by thecorporatecounsel.net’s Broc Romanek, the latest figures show a 75% fall in retail shareholder accounts voting in 80 notice-and-access meetings to the end of February. The number of retail accounts voting dropped from 19.2% to 4.6%.

Furthermore, only 0.70% of shareholders requested printed materials after receiving their notices of Internet availability in the mail. You can download the complete report from Broadridge’s website.

E-proxy undermines SEC’s investor protection mandate

It doesn’t take a genius to realize that if 95% of retail shareholder accounts are not voting, then that probably means they’re not going online to read their proxy statements and annual reports. And we also know that almost none of them are asking for those reports to be mailed to them.

In other words, far fewer retail investors are receiving information that regulators believe is vital to them being able to make informed decisions about their investments.

From an investor protection perspective, that’s bad news because ignorance is not bliss in an effective securities system. You just have to look at the sub-prime crisis to see what happens when investors don’t know for sure what they have in their portfolios.

So you can argue all you want about the success of e-proxy in terms of environmental benefits and cost savings, but the SEC’s principal mandate is to protect investors — not the environment or issuers’ disclosure budgets.

In that sense, e-proxy has resulted in the SEC failing in its core mandate to protect America’s investors — and that can’t be taken lightly.

Prove to investors that the web is better

The problems with the notice-and-access process are complex. There’s no quick fix. Things may get better in time as investors become more familiar with the process and the notices are improved, but there’s also an equal risk that they could get worse.

Investors are not going to gravitate to accessing proxy statements and annual reports online until doing so is a pleasant experience. And with the exception of Intel and perhaps AMERCO, none of the companies using notice-and-access so far have done that.

Some people question whether the usability of current online reports is as bad as I and others have said. They forget, though, that before we got the opt-out notice-and-access system, we had an opt-in electronic delivery system that let investors choose when they were ready to give up printed materials.

The old system was never given a fair chance to succeed. Most companies never lived up to their end of the bargain. They failed to provide web experiences that would have made it attractive for investors to go online.

In fact, millions of people who initially opted in to e-delivery later withdrew their authorizations. If ever there was evidence that the market was not ready for default electronic delivery, it was that inconvenient truth.

In a comment letter to the SEC when e-proxy was first proposed, ADP/Broadridge provided the following important insight:

“Under the current approach, over 10 million investors are now enrolled in e-delivery. Since e-delivery was made a legal means to communicate with shareholders, 2.4 million investors who initially elected e-delivery have dropped out of the program. From these 2.4 million investors, ADP has received over 600 thousand comments expressing the reasons why they changed their mind. Many investors who initially opt for e-delivery discover that they prefer the convenience of physical materials. They express concerns about the security of financial information over the Internet, the difficulty of reading materials on a computer screen, concerns with technology and email generally, and concerns about the cost of printing materials shifting to them from issuers.”

Fast forward to today and nothing has changed in terms of the web experiences companies are providing to their shareholders. In fact, things are worse because more companies are using unusable online formats out of fear, uncertainty and doubt.

Until accessing your proxy materials on the web is easy, engaging and meaningful on a personal level, investors aren’t going to respond to the notices that arrive in the mail unless they are institutions with an obligation to do so.

The answer to the malaise rests squarely with companies themselves. They can no longer ignore the web or think about it at the last minute. It is just plain bad management to fob off the web design work with five days to spare to a big vendor that can’t provide the attention to detail needed for effective online documents.

Indeed, fixing e-proxy requires acknowledgment that it isn’t a once-a-year thing like Xmas. Companies must work throughout the year to attract investors to their websites and prove to them that the web is a much better option than paper.

Investor relations websites must become essential destinations again, not only for accessing information but for interacting with management (see GE) and the investor relations department (see Dell).

Attracting investors back to companies’ IR websites won’t happen quickly. But if companies make the effort, shareholders will respond.

The SEC’s role

The SEC has taken steps recently — such as with the shareholder forums rules — to make it easier for companies to provide meaningful online communications with shareholders. And they are moving ahead with XBRL, which will have massive benefits in the longer term.

But the agency also can use its stick. The e-proxy rules contain requirements for companies to provide their proxy materials in online formats that are “convenient” for shareholders. The adopting releases made it quite clear what the SEC was looking for, but obviously not clear enough because the advice has been almost universally ignored.

The SEC should start enforcing its “convenient” standard with companies individually and with big vendors like Broadridge, Computershare, DST and BNY Mellon. It needs to make it clear that their image-based and Flash-based online reports are not up to the standards that are expected.

The IR and corporate secretary associations’ role

For me, it is highly relevant that there are no industry led programs in the US designed to promote best practices in online investor communications and shareholder relations.

The SEC’s Advisory Committee on Improvements to Financial Reporting has recommended that industry participants “coordinate among themselves to develop uniform best practices on uses of corporate websites for delivering corporate information to investors and the market.”

This is where the National Investor Relations Institute and the corporate secretaries and shareholder relations associations, along with the stock exchanges and other players, could play an important role, as they have in other jurisdictions.

I have said before that online investor communications practices are much better in Europe than they are in North America, and that is thanks in no small part to initiatives like the IR Best Practice Awards program that is coordinated by the UK Investor Relations Society. Just this week, they opened nominations for the 2008 awards and published three sets of guidelines for best practices.

Among the resources the IRS recommends to participants is our website. I would welcome the same thing from NIRI and I stand prepared to volunteer my time and expertise to help them bring a similar program and resources to the US.

But the initiative has to come from the profession. There needs to be a recognition that something is broken and needs to be fixed.

So that’s what I think. E-proxy is a gigantic investor protection flop, companies need to reach out to investors online, the SEC should tap its stick, and the IR profession needs to promote best practice and stop kowtowing to the Thomson-Reuters of the world.

What do you think?