A FEW months ago, there was talk at the US Securities and Exchange Commission (SEC) about making changes to address the lack of participation by retail shareholders in annual meetings where companies used the new default electronic delivery option called notice-and-access.
You will recall that under the new option, companies mail a notice to their shareholders advising them how to view their annual reports and proxy statements online or request paper copies to be mailed to them. The new process bombed, with about 75% fewer retail shareholders participating and less than 1% actually going to the designated website and then accessing the proxy materials prior to voting.
No doubt, for an agency with a mandate to ensure investors are protected and that markets operate efficiently, mass ambivalence and wholesale ignorance are not the results the SEC was hoping for. There’s been more talk recently about the commission’s staff really wanting to find a fix.
So I’ve been thinking about what I would do if I were in the SEC’s shoes, and here’s what I’ve come up with:
1. Clarify the cookie issue.
Even though it’s about a minute bit of text, this has actually turned out to be a major issue. It has resulted in unnecessary cost to companies and poor user experiences for investors. The problem is that vendors are scaring companies into believing that they have to host their proxy materials on a “cookie-free” website, which very few have.
Consequently, companies are paying Broadridge, and sometimes their transfer agents as well, to scan their print annual reports and proxy statements to images and then post these in unusable image-based documents on Broadridge’s servers. Companies think Broadridge’s servers are cookie-free, but they actually are not. But that’s not the problem.
The problem is that the rule itself does not have a prohibition on cookies per se, only cookies that infringe upon the anonymity of visitors to the site. Most cookies don’t infringe upon users’ anonymity. Most often they serve useful purposes. For example, cookies are often vital for web analytics, which can be used to improve the user experience of future documents.
Cookies also make it easier to offer investors tools like print baskets. This is a device where the investor can add pages from an online document to a print basket for printing at the end of their session. This doesn’t infringe on users’ anonymity and actually improves their experience using the materials. Yes, companies could use other technologies to do these things, but why should they have that burden?
Unfortunately, in the drafting of the adopting release reference was made near the end to a “prohibition against cookies” which, if you read it out of context of everything else in the release (and the release that preceded it), could lead you to think cookie-free is the law. The release should have said something like “prohibition against any technology or practice that infringes upon the anonymity of investors” because cookies aren’t the only way to infringe on users’ anonymity.
If the SEC addresses the confusion by being clear that companies’ sites don’t have to be “cookie-free,” then companies will be able to host materials on their own sites. I believe this will lead more companies to provide better online experiences for shareholders than what is possible from Broadridge, the transfer agents, or the financial printers.
2. Improve the Notice.
This is a no-brainer and Broadridge has shown me some very good mockups of what they’d like to do. They’ve also got an envelope that draws attention to the importance of the information inside. Both the new notice and the envelope should be approved. But they should emphasize informed voting by urging shareholders to read the materials. As for the educational insert Broadridge wants to include in the mailing, I doubt it will make a difference because it’s not going to be read by most people. It will just add to the cost, but if companies want to include it, I don’t see a reason to stop them.
3. Enforce the readability requirement.
This is VITAL. Under the rules, companies have to post their proxy materials in a format, or formats, convenient for both reading online and for printing. This applies to all companies whether they’re using notice-and-access or delivering full packages. I think it’s inappropriate to require companies that are mailing printed materials to incur the additional expense of providing their annual reports in multiple formats — HTML and PDF, which is essentially the requirement. I’d go easy on them.
Only companies that are using notice-and-access, thereby potentially saving considerable sums on printing and mailing costs, should be required to meet the online readability and printing requirement. They can easily afford it. And the requirement, which the SEC should clarify to mean HTML text, should be vigorously enforced.
It wasn’t enforced during the first year and shareholders are worse off for it. We got scanned images of printed documents that break every usability convention and accessibility rule in the book. See my article from a year ago for more on the problems with the proxy documents Broadridge and the transfer agents are producing.
If the improved notices are going to drive more people to the web this coming year, you don’t want them to have a bad experience that could cause them to ignore future notices.
4. Relax the notice deadline.
Making companies post their materials 40 days in advance of their meetings means they don’t have enough time to prepare their materials properly for the web. I think 30 days is sufficient notice time, but even five more days would be helpful. But then there can’t be any excuses for not producing readable documents.
5. Emphasize delivery ahead of voting.
Broadridge has designed its notice-and-access website, www.proxyvote.com, and its notices to emphasize voting. But the rules are supposed to be about delivery, not voting. Investors must receive the materials prior to having access to the voting card or online form. That was a big issue in the comment period.
However, Broadridge is effectively delivering the proxy card ahead of the materials due to how they have designed the www.proxyvote.com website. They’ll argue that’s not true, but the numbers don’t lie. Of the people who go to their site, over 90% bypass the materials. It’s baked into their design.
The process should be that investors access the voting sites via the annual report and the proxy statement. This is simple to do. IBM’s proxy statements and annual reports do this well. They provide a link to the voting sites on every page. There’s no reason why every company using notice-and-access cannot follow IBM’s example.
Delivery ahead of voting is important. If companies make an effort with their materials, as IBM has, then shareholders will have a good experience online and be more willing to respond to future notices.
6. Ban bifurcated mailings.
Companies can currently segment their shareholder lists and send printed materials to some investors and not to others. Companies are using this to chase quorums. The idea is that those shareholders who hold the most stock get the printed materials because companies need their votes to reach a quorum, while the smaller shareholders get the notice because they’re largely immaterial to the outcome.
All shareholders should be treated the same, regardless of their shareholding size. If a company wants to use notice-and-access then it should do so for all shareholders.
If you don’t make this a requirement, then companies won’t make an effort to provide good online experiences for their smaller shareholders. Besides, the largest shareholders tend to vote anyway because they have more skin in the game or they have an obligation to vote, so sending them printed materials is unnecessary.
7. Encourage engagement.
I left this for last, but it is the single most important thing I would do. If people feel that there is meaning in participating, they will come out in droves. Companies need to give their shareholders opportunities to engage the board and management via the web. Allow for commenting mechanisms similar to the SEC’s commenting process. Encourage companies to hold open webcasts like GE did last year.
What the heck, let companies provide comment forms at the bottom of every page of their online proxy statements, and let shareholders have their say on the information on those pages. It’s not going to change the outcome of the vote and the world is not going to end either. But it will let shareholders express their views and give directors some insight into how their shareholders really feel.
But, and this is key, anyone who comments must use their real name and provide a way for companies to verify they are who they say, like a phone number and mailing address. Anonymity is fine when people cast their ballots, but if you’re going to mouth off and have your comments published for others to see, then you need to be prepared to put your name to what you say.
Those are the key improvements I would make. There are some others that companies should do voluntarily, but there’s no need for the SEC to mandate them or get involved. I know there are other people who have strong opinions on this topic, especially about the fees Broadridge is charging. I’m not going to weigh in on those issues, except to say that Broadridge is as close a thing there is to a monopoly and should be treated as such. If you have any thoughts on the topic, please post them in the comments.
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