by Cydney Posner
In case you missed it, Gretchen Morgenson’s column in the Sunday NYT railed against virtual-only annual meetings, which according to her data (provided by Broadridge), have increased in number from 21 in 2011 to 154 in 2016. And joining in the condemnation of the practice was NYC Comptroller Scott Stringer, who, you may recall, submitted 75 shareholder proposals for proxy access at major companies in 2014, triggering the movement toward wider adoption of proxy access bylaws. Interestingly, the virtual annual meeting was initially viewed as “CPR” for the debilitated annual shareholders’ meeting, which had, over time, evolved into a moribund ritual of corporate governance, as fewer and fewer shareholders were able or willing to overcome the logistical and financial burdens of attendance in person. With virtual technology, large numbers of shareholders were suddenly able to attend meetings on their laptops. Ironically, however, it is shareholders — the designated beneficiaries of the virtual annual meeting — that have raised objections.
What’s their beef? It’s that, Morgenson observes, instead of using “technology to be open and transparent with their stakeholders,… [companies] deploy it to go underground….Virtual meetings, some investors say, cede far too much control to corporate managers during the sole event each year when they must look owners in the eye and listen to their views. Managers presiding at virtual-only confabs, critics say, can cherry-pick which shareholders’ questions to answer and prevent investors from communicating one on one with management.” While Morgenson acknowledges that virtual-only annual meetings may make sense for smaller companies that hold meetings rarely attended by any shareholders, she expresses concern that the incidence of virtual-only meetings has also increased among S&P 500 companies; in 2016, 14 companies in the S&P 500 held virtual-only meetings with at least six more expected to follow suit in 2017.
Why do some companies prefer virtual-only meetings? Assuming some preparation is required 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 serious time and cost savings. And, at companies where the annual meeting has indeed deteriorated into a largely scripted, non-substantive event — a corporate governance kabuki that holds little attraction for most shareholders — those cost savings may be especially attractive. Not to mention the fact that companies are usually pleased by the increase in the proportion of proxies, which are typically pro-management.
However, there are other reasons that may appear to be less anodyne. As I wrote in this PubCo post in 2016, 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. For many companies, therefore, the absence of 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. To that end, when disruption is anticipated, there is a long history of companies’ holding their meetings in far-flung and almost inaccessible locations to discourage attendance. Virtual-only meetings offer an alternative “venue” to achieve that same goal.
SideBar: 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.”
In addition, as Morgenson suggests, the virtual-meeting technology permits management to pre-select questions and prepare answers in advance. As noted in this column from the Deal Professor in the NYT, Broadridge, which offers the technology for virtual meetings, 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.” He also laments the absence of direct eye-to-eye engagement by shareholders with management and boards: questions posed by shareholders “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.” For many of these reasons, both the Council of Institutional Investors and CalPERS advocate that companies using virtual technology hold hybrid meetings to expand, not limit, shareholder participation.
How does NYC Comptroller Stringer, whose office oversees several New York City pension funds, plan to deter companies from going virtual-only? It seems unlikely that he would adopt the strategy he employed to promote proxy access — submitting en masse shareholder proposals — to require in-person meetings. During this proxy season, there have been at least three shareholder proposals requesting that the boards adopt corporate governance policies to initiate or restore in-person annual meetings and publicize this policy to investors. In one case, the Corp Fin staff permitted the proposals to be excluded on just a technical basis, but in the two other cases, exclusion was permitted because the proposals related to the companies’ ordinary business operations, with the staff noting that the proposals related to the determination of whether to hold annual meetings in person. Consequently, for now at least, it does not appear that the shareholder proposal approach offers a viable path to addressing this issue.
Instead, Stringer’s office is employing the now-familiar technique of “shareholder engagement” with portfolio companies that held virtual-only meetings last year, advising that, “[i]f they continue down this path,…the comptroller’s office will recommend the pensions vote against the election of all directors sitting on corporate governance committees at the companies.” Stringer observed in a statement that “[i]t’s one of the great markers of American enterprise — whether you own one share or one million, you can speak at a company’s annual meeting. Except now, in this interconnected world, companies are using technological tools to whittle away at investors’ rights and hide from accountability. If boards shirk this responsibility, share owners should join us in holding them accountable.”
In light of the unrelenting criticism of virtual-only meetings, companies considering the virtual-only alternative may want to avoid the public perception that they are hiding behind technology to insulate management and directors from shareholders. One approach that may help to dispel that negative public perception and make virtual-only meetings less objectionable to these protesting institutional holders may be to employ the types of safeguards and best practices suggested in Guidelines for Protecting and Enhancing Online Shareholder Participation in Annual Meetings, developed by CalSTRS, the National Association of Corporate Directors, NASDAQ, the Society of Corporate Secretaries & Governance Professionals and others. The Guidelines identify factors to be taken into account in deciding whether to hold a virtual-only meeting (since, notably, the group participants could not reach agreement among themselves on that issue) and suggest guidelines designed to protect the interests of shareholders and to ensure that companies “are not using technology to avoid opportunities for dialogue that would otherwise be available at an in-person shareholder meeting.” The Guidelines also recommend “best practices” designed “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.” These Guidelines are described in more detail in this PubCo post.
