Just in time for the new proxy season comes this Report of the 2020 Multi-Stakeholder Working Group on Practices for Virtual Shareholder Meetings from the Rutgers Center for Corporate Law and Governance, the Council of Institutional Investors and the Society for Corporate Governance. The report is replete with helpful guidance, detailing best and emerging practices for virtual shareholder meetings. The Working Group updates its 2018 report (see this PubCo post) in light of the deluge of pandemic-induced VSMs that were convened during the 2020 proxy season. Sorry to say, but it seems likely that this new proxy season will see a repeat for the same reason—at least in the first part of the season—so this report should be especially useful.
As demonstrated in Appendix B, the increase in the prevalence of VSMs has been, not surprisingly, dramatic, but as for other aspects of VSMs—much less so. For example, in 2019, the number of VSMs was 318; in 2020, through June 30, the number was 2,367. Very few have been hybrid meetings—only 30 in 2020—and almost all VSMs were audio-only in 2020. The meetings this year averaged about 20 minutes, with longest coming in at 2½ hours. Attendance, although still limited, has more than doubled from an average of 19 shareholders and guests in 2019 to 48 in 2020, with 1,000 attending in one case. Actual voting at the meeting has been de minimis—an average of three in 2020, with a high of 178 (only one in 2018 and 2019). Almost all VSMs allowed questions to be submitted during the meeting, with the average number of questions increasing from one in 2019 to five in 2020, with a high of 316. (Maybe that was the 2½ hour meeting?) In 2020, less than 1% of VSMs allowed questions to come in by phone during the meeting.
The expressed goal of the 2020 Working Group “is for companies, investors, and service providers to conduct VSMs in ways that replicate the in-person annual meeting experience for the shareholder as closely as possible in order to foster effective corporate governance.” Admittedly, however, not everyone will be in a position to adhere to all of the best practices identified in the report, and the Working Group recognizes that, as a whole, this set of practices “can be seen as aspirational for now.”
One concern that arose frequently during the 2020 proxy season was seen as outside the scope of the report. That concern related to the difficulty some beneficial owners experienced in entering VSMs as a result of complexity of the system of holding and voting securities referred to as “proxy plumbing.” The report indicates that “discussions over the possibility of overhauling all or parts of it are ongoing among industry groups.” To that end, the report notes, the End-to-End Vote Confirmation Working Group Subcommittee was convened “with the aid of the SEC” by various industry participants following the SEC’s 2018 Proxy Roundtable. According to the report, Subcommittee members are “developing an online solution that will enable VSM hosts to electronically poll Broadridge, Mediant and other agents servicing banks and brokers to validate beneficial owners. Through this new process, issuers will be able to admit beneficial owners who wish to attend the virtual meeting, ask questions and vote. The Subcommittee expects these technical changes to be in place for the 2021 proxy season.”
Views on VSMs
Shareholders. Institutional shareholders have long been skeptical of VSMs, arguing that they insulate management and the board from shareholder interaction, allowing management to avoid uncomfortable questions, which could undermine “their ability to hold management accountable.”
According to the report, the experiences of institutional shareholders at VSMs this year “confirmed for them that a VSM is a wholly inadequate replacement for an in-person meeting, with few opportunities for the interactivity and discussion they expect,” and validated their “long-held concerns” that VSMs have the effect of marginalizing shareholders. More specifically, they identified:
- “General sense that companies had much tighter control over the structure and flow of the Q&A sessions than at in-person meetings, including a feeling that some companies were ‘cherry picking’ innocuous questions and favorable comments over difficult questions and critiques
- Apprehension created by a lack of transparency about certain companies’ use of discretion to combine or paraphrase similar questions or reword questions.
- Suspicion that some questions asked and answered during the Q&A sessions at certain companies were generated by the companies themselves, as opposed to verified shareholders, with rehearsed answers from the meeting chairs as a way to avoid difficult questions and fill the time allotted for Q&A.
- Inability for shareholders to ask follow-up questions the way they could at in-person meetings.
- Loss of opportunities for shareholders to interact with eye contact, both formally and informally, with board members, company executives, and other shareholders.”
Some shareholders had a somewhat more favorable impression and appreciated the ability to attend more meetings on their laptops, present proposals and ask more questions. However, the report notes that some shareholders experienced confusion and unanticipated challenges in attending many of the VSMs, which the report attributes in part to the quick transition to VSMs prompted by the pandemic. For example, some “shareholders wishing to ask questions were not given clear instructions on how to submit their questions during the meeting. Unlike at in-person meetings, questions had to be submitted in writing and were then read (or paraphrased) by management.”
Shareholder Proponents. Generally, shareholder proponents indicated that “they were able to present their proposals without difficulty,” were often given a choice as to how they would like their proposals presented, and were treated professionally and with respect. Some companies had written statements from proponents or pre-recorded statements ready just in case of technical glitches. The report does cite one instance where the shareholder proponents were not permitted to present their proposals in their own voices.
Companies. Companies’ experience was generally positive, with surprisingly few technical glitches, increased shareholder attendance and lower cost (other than for companies that have historically held their annual meetings at their own headquarters with few attendees). Increased coordination was required with regard to managing the meeting, shareholder proposals and Q&A, especially given the need to remain in different locations as a result of COVID-19. For some individuals, however, the tech learning curve was steep. Companies also had to adjust to the new process for submitting questions, which were written, submitted before or during the meeting, unlimited in number and often anonymous.
Guiding principles. The 2020 Working Group report reiterated as still valid the guiding principles set forth in the 2018 Report:
- “Broad investor participation in annual meetings should be valued and encouraged.
- Shareholder meetings should promote equitable and equal treatment of investor participants.
- Opportunities for meaningful engagement between investors and boards should be provided.
- Issuers should communicate the benefits of a VSM to shareholders.
- VSMs should be used as a way to provide meaningful open dialogue between shareholders and companies.”
Trends in best practices. The report noted that many of the “best practices” identified in 2018 had become standard practices in 2020. The Working Group determined that some practices that were not widely adopted should be more strongly advocated in the future. Best practices identified in the report address disclosure; training, rehearsals and other preparations for the meeting, including allowing shareholders to test connectivity in advance; communications with proponents of shareholder proposals; the platform format (audio or video); submission of questions from shareholders; posted content; assistance for attendees; meeting proceedings, including announcements, shareholder proposals and Q&A; and post-meeting actions, including advice to post a record of the entire meeting, including the Q&A, on the company website after the meeting. More detail about some of those practices is discussed below:
- Disclosure. The report provides guidance regarding disclosure about meeting attendance and submission of questions. For example, among other things, the report advises that companies explain the different procedures for attendance by shareholders of record and beneficial owners holding in street name, highlighting whether a shareholder must provide additional information (such as a separate control number or a legal proxy) in advance of the meeting and how to do so. The company should also consider indicating how shareholders can contact the company or the VSM service provider with questions about attending. With regard to submission of questions, the report advises that companies make clear, if true, that only verified shareholders (not guests) will be eligible to ask questions, explain any requirements or limitations on asking questions at the meeting (such as time allotted for each question, any limit on the number of questions per shareholder), how to submit questions in advance, and the use of discretion by the company to select questions and paraphrase questions. The report also advises that the company explain, as to questions it is unable to address at the meeting, whether the company will respond to those questions after the meeting. The report suggests that companies explain why the company has chosen to use a VSM format for this meeting.
- Shareholder proposals. Shareholder proponents should be given access to the meeting “to formally present their proposals, be heard clearly and uninterrupted by all attendees, and be fully able to participate in any Q&A session.” Accordingly, companies should discuss logistics with proponents in advance, provide proponents with a dedicated connection for real-time presentation of proposals (including advance testing to avoid background noise, delays or other issues), encourage the proponent to connect to the meeting in advance, ensure that the proponent can clearly hear the chair and be heard by attendees, offer proponents the option (in lieu of attendance) of providing a pre-recorded statement or a written statement for management to play or read aloud at the meeting (which should be audible with the same sound quality as the rest of the meeting), advise proponents of the agenda, timing and limitations for presentation of their proposals and any other instructions—including when to begin speaking and how the company will indicate that the allotted time is over—and discuss contingency plans in the event of technical difficulties affecting the proponent.
- Questions. In light of the importance of shareholder engagement with boards and management, companies should allocate enough time on the agenda for questions, taking into account the number of questions submitted in advance and reasonably anticipated to be submitted during the meeting. At the meeting, the report advises that companies explain how much time is dedicated to the Q&A session, how the company will address questions not addressed during the allotted time, the order of presentation of the questions and whether a single shareholder was able to submit more than one question. In addition, the company should identify each questioner before the question and recite each question as submitted without paraphrasing unless necessary to make the question comprehensible. In the event of multiple questions on the same topic, the company should indicate that substantially similar questions were submitted by other shareholders. If the company solicited questions in advance, the report advises the company to address all (or substantially all) questions received in advance. The CEO and other members of management, as well as the board chair or lead director and board committee chairs, should attend and have the ability to respond audibly to questions during the Q&A.
Optional and emerging practices. The report also highlights a number of practices that some companies adopted this past season that might be worth consideration. Examples include:
- “Posting all questions received both before and during the meeting, and corresponding answers, on the company’s website within a reasonable period of time after the meeting….
- Allowing shareholders to call in to ask questions and be heard in real time….
- Providing closed captioning or signing for the hearing impaired.
- Providing real-time translations into multiple languages.
- Giving shareholders the ability to see all appropriate questions submitted in advance of the meeting and in real time and track prioritization of the questions in the queue throughout the meeting.
- Giving shareholders the ability to indicate their level of interest in particular questions shown in the queue.”
Presumably, some of emerging practices related to availability of questions are targeted at the concern that VSMs allow managements to cherry-pick questions, avoiding questions that touch on uncomfortable issues.
Happy holidays everyone! Good riddance to 2020! Hooray for science and scientists!