by Cydney Posner
For many years, annual meetings of shareholders have been viewed as increasingly moribund rituals of corporate governance, as fewer and fewer shareholders are able or willing to overcome the logistical and financial burdens of attendance in person. As a result, in many cases, meetings have evolved into a kind of corporate governance kabuki — largely scripted, non-substantive events — that hold little attraction for most shareholders. Meetings that are not formulaic are often closer to street theater, with unruly shareholders or demonstrators disrupting the business of the meeting with incendiary questions or otherwise performing for the media. (See, for example, this photo in the Financial Times of a smiling “Money Bunny” parading in front of a bank’s annual meeting in decidedly non-banker attire — although she is sporting a garland of faux dollar bills on her arm — holding a whip and a sign that says “Naughty banks need a spanking.”) For many companies, therefore, sparse shareholder attendance is not necessarily an undesirable turn of events, as managements and boards welcome the reduction in acrimonious or uncomfortable in-person exchanges with dissatisfied or eccentric shareholders. Not to mention the fact that companies are usually pleased by the increase in the proportion of proxies, which are typically pro-management.
With the advent, and increasing pervasiveness, of the internet, the physical obstacles to attendance and participation in annual meetings were largely removed. Reportedly, the first company to supplement its physical annual meeting with a webcast version — including allowing online participants to e-mail questions to management — was, fittingly, Bell & Howell in 1996. According to reports, the in-person meeting (consisting of a slide show, a CEO presentation and a Q&A session) was held at corporate headquarters, with simultaneous transmission, including PowerPoint, over the internet using AudioNet, at a cost of $10,000 to $15,000. Approximately 230 people listened in. Questions were allowed to be submitted by email commencing two days prior to the meeting. The company received in advance approximately 15 questions, which were handed to the CEO, who read them aloud and provided responses. Questions received during the meeting were also printed out and handed to the CEO. According to reports, the company noticed little difference between the types of questions raised at the physical meeting and those received over the internet.
Since that antediluvian experiment in electronics, many companies have conducted “hybrid” meetings, that is, physical meetings supplemented by real-time audio or video, with a variety of types of online participation by shareholders. But “virtual only” meetings remained scarce largely because state corporate law still operated in a bricks-and-mortar world. It was not until 2000 that Delaware, the state of incorporation for the vast majority of public companies, finally amended its corporation law to permit Delaware corporations to hold their annual meetings entirely online, allowing large numbers of shareholders to attend meetings on their laptops. Delaware’s action was widely hailed by governance experts and commentators as “CPR” for the debilitated annual shareholders’ meeting. However, for a number of years following Delaware’s action, shareholders — ironically, the designated beneficiaries of the virtual annual meeting — objected to the virtual-only meeting because it was viewed to insulate management and directors from shareholders.
For example, at a virtual-only meeting held by one large early adopter, an institutional shareholder objected that only two shareholder questions were answered and that there was no opportunity to see questions submitted by others, to find out who had submitted the questions answered or to follow-up on any questions. Similarly, an investment manager criticized the audio virtual-only meeting, speculating that questions were ignored or paraphrased to mute their intensity: “As an investment manager at an in-person meeting, you get to ask questions of management and you can see in the eye and hear in the voice of the reply if they’ve ever thought about it before. There is a sparking back and forth as people ask questions — you can get the sentiment of the crowd. But online, nobody knew anything. There was no live link, no viewing of questions that were being asked.” As a result of reactions like these, virtual-only shareholders’ meetings appeared to have died a perhaps premature death. In 2009, the leading virtual meeting service, Broadridge, hosted only one virtual-only meeting and three hybrid meetings.
According to this article in the Financial Times, however, the times they are a-changing. In 2015, Broadridge is reported to have hosted 90 virtual-only meetings and 44 hybrids. And, according to a Broadridge representative quoted in the article, 2016 is predicted to “surpass the 44 per cent year-on-year increase in 2015.” (Keep in mind, though, the numbers are still quite small relative to the thousands of public companies that have shareholders’ meetings every year, even considering that some companies go the DIY route.) The article reports that virtual annual meetings are now being embraced and promoted as a mechanism to improve transparency and shareholder access. And assuming some preparation for shareholder attendance at the typical physical meeting — all sorts of logistics from location rental, food and potted plants to security guards and stand-by ambulances, where necessary — virtual meetings can result in real cost savings.
But that doesn’t mean that the controversy surrounding virtual-only meetings has abated: critics continue to contend that virtual-only meetings limit an important shareholder right, precluding shareholders from direct eye-to-eye engagement with management and the board. For example, the policy of the Council of Institutional Investors currently provides that companies should hold virtual meetings “only as a supplement to traditional in-person shareowner meetings, not as a substitute. Companies incorporating virtual technology into their shareowner meeting should use it as a tool for broadening, not limiting, shareowner meeting participation. With this objective in mind, a virtual option, if used, should facilitate the opportunity for remote attendees to participate in the meeting to the same degree as in-person attendees.”
Similarly, the FT article contends that using “technology to broaden access is well and good; using it to shut out shareholders is another.” And that view was echoed recently in this column in the NYT by the Deal Professor, who concluded that they are “a bad idea”: “Perhaps more important, a virtual shareholders’ meeting allows the company to manage troublesome shareholders and their often uncomfortable questions. Some of this may provide a welcome limit on the time monopolized by corporate gadflies…. But there are other things a company gains by eliminating in-person shareholders’ meetings — and that is limiting tough questions. Broadridge specifically states this advantage in its marketing materials. ‘Issuers can privately view and manage shareholder questions without broadcasting to other attendees.’ This means a company can pre-empt shareholder activists before they even arrive on the scene.” Noting that some companies have a habit of holding their meetings in remote locations when they expect to face activists, the author contends that a “virtual meeting eliminates the potential for a public relations disaster.” The ability afforded by the virtual meeting to handpick questions and “preprogram” responses
“makes it clear to [the author] that the virtual meeting raises troubling trends, a reason it is opposed by leading shareholder groups like the Council of Institutional Investors and the California Public Employees’ Retirement System. The in-person shareholders’ meeting is the sole opportunity all shareholders have to meet and talk with management. Indeed, at many small and midsize companies, the conversation continues as shareholders talk with management before and after the meeting. They also have the opportunity to ask questions that put management on the spot. These questions can directly influence what management thinks and says…. To be sure, these meetings can be a pain, but even the haranguing can be a good thing, forcing management to confront its entrenched biases. The gadflies may be persistent, but they also may be right.”
The Deal Professor also advocates that annual meetings be turned into fun events, as they are at companies like Berkshire Hathaway, and laments the loss of the connections that can be made between the company and its shareholders at annual meetings: “It’s here where perhaps the subtlest objection comes to virtual meetings. By forcing everything onto the web, we lose the personal interaction. Everyone logs in and watches a preprogrammed set of questions and answers. And then everyone goes away. Management’s worldview is reaffirmed in the 10 or so minutes it allows for questioning, and there is no engagement except with those investors who own a portion of shares large enough to personally meet with management. It’s a modern world that is frightening in its disengagement.”
In light of these concerns, a group of representatives of “interested constituencies,” including CalSTRS, the National Association of Corporate Directors, NASDAQ, the Society of Corporate Secretaries & Governance Professionals and others, met to develop a set of best practices or safeguards for virtual meetings, resulting, in 2012, in Guidelines for Protecting and Enhancing Online Shareholder Participation in Annual Meetings. Interestingly, the introduction to the Guidelines admits that the group participants were “unable to agree on when virtual-only and hybrid meetings of shareholders may be used….” and, ultimately, left that decision for each company to make on its own, taking into account factors such as these:
- “Whether a matter to be considered at the meeting is the subject of a counter-solicitation or a ‘vote no’ campaign
- Whether a controversial management or shareholder proposal will be considered at the meeting
- Whether a business transaction, such as a merger, will be considered at the meeting
- Whether the company is the subject of significant shareholder dissent (e.g., significant governance, operational or performance issues)
- Whether the meeting will be limited to the consideration of routine or non-controversial proposals (e.g., the uncontested election of directors and the ratification of auditors)
- Whether shareholders usually attend the company’s annual meeting, or whether annual meetings of the company are generally attended solely by management of the company.”
Among the guidelines developed by the group are these:
- Companies should employ safeguards to protect the interests of shareholders and to ensure that they “are not using technology to avoid opportunities for dialogue that would otherwise be available at an in-person shareholder meeting.”
- Companies should take steps to “ensure that the shareholder meeting is accessible to all of a company’s shareholders, to the extent practicable. Steps to be considered include offering telephone or videoconferencing access “so that shareholders can call in to ask questions during the meeting,” ensuring accessible technology “by utilizing a platform that accommodates most, if not all, shareholders,” providing a technical support line for shareholders, and opening web lines and telephone lines in advance for pre-testing access.
- Companies should perform a cost/benefit analysis, taking into account the various meeting alternatives and the rights of shareholders.
The “best practices” recommended by the group “to ensure that online participation in shareholder meetings provides the same opportunity for dialogue among shareholders, management and directors that is possible at an exclusively in-person shareholder meeting” include those summarized below:
- Publish principles for online participation a reasonable time in advance of, and during, the meeting
- Establish procedures to validate online meeting participants as shareholders, to determine whether non-shareholders may attend online or on a view/listen-only basis, and for remote voting and recording of votes
- Establish “reasonable guidelines” for questions from shareholders participating online, including
- “Procedures to post all questions received in advance of the meeting and to allow investors to communicate before the meeting to indicate they wish to ask a question or make a statement
- “Specific and reasonable time guidelines for questions asked of management (e.g., five minutes for shareholders presenting proposals and two minutes for general questions)
- “Specific and reasonable guidelines for the display of questions and answers.” In light of concerns expressed regarding the “potential for manipulation by companies” with respect to filtering of questions and answers, the group considered the following to be acceptable practices:
- Displaying all reasonable questions asked during a meeting (which would allow discretion to omit malicious, frivolous or duplicative questions)
- Organizing and answering questions based on groupings of related questions or based on the order of time submitted
- In a hybrid meeting, alternating questions between in-person, telephone and internet attendees
- Establishing reasonable procedures for shareholders to ask questions via telephone or videoconference
- Establishing procedures for questions received but not answered during the meeting, for shareholder revocation of questions and for posting all questions and answers after the meeting, including the specifics related to each question (e.g., how many questions were received on a specific matter)
- Arrange for in-person, telephone or video presentation of shareholder proposals, so long as the shareholder makes the request a reasonable time in advance
- Disclose in the proxy materials the type of meeting to be held the following year
- Archive the meeting on a publicly accessible website for a reasonable period of time
SoapBox: The potential for avoiding a circus atmosphere by holding a virtual-only meeting may, in many cases, have a Siren’s appeal. In light of the unrelenting criticism of virtual-only meetings, however, companies considering the virtual-only alternative may want to take into account the possibility of the public perception that they are hiding behind technology to side-step shareholder engagement— to many, the sine qua non of corporate governance (for the moment anyway). Adopting the guidelines and best practices above may help to dispel that negative public perception.
In addition, most of these critiques do not really address the typical small- or medium-sized (and sometimes even large) public company meeting where most often, in the absence of controversy, only one or two — and frequently, zero — non-management shareholders even show up. In those cases, especially where best practices are followed and the expense of travel to the meeting and time commitment may be prohibitive for shareholders, isn’t it possible that a virtual meeting may actually achieve its original objectives: enhance shareholder participation and save costs for the company?