Comparison of “Proxy Plumbing” Recommendations
http://shareholdercoalition.com/CoalitionDiscussionDraftAug2009.pdf
http://www.altmangroup.com/pdf/PracticalSolutionTAG.pdf
Discussion draft circulated by James McRitchie, Publisher Corpgov.net
Please send comments and additional items for consideration to mailto:
Investor Education
Shareholder Communications Coalition: Should explain proxy voting process and encourage voting proxies.
The Altman Group: The exchanges should mandate brokers distribute education information on “proxy voting” to new clients and with statements. They should also be required to post jointly prepared tutorials on client voting. Informational inserts could also be included in proxy packages distributed by Broadridge or other parties. NYSE and NASDAQ should mandate all member firms distribute educational information re “proxy voting” to all clients and should jointly prepare tutorials and post online. All brokers should be required to include educational materials with statements to clients.
Comment: Any investor education program should emphasize not just protection of shareowners as consumers but their responsibilities as owners. It should include information on how to find out how other shareowners are voting. Known sources of proxy voting advice such as Proxy Democracy, TransparentDemocracy.org, and MoxyVote.com, should be highlighted. The SEC should fund a pilot project, using a format similar to USA Investor Education VoterMedia.org at http://www.votermedia.org/communities/223-usa-investor-ed, which allows investors themselves to decide what groups are providing the most valuable education and facilitates distribution of funds to those groups based on the vote of users. One issue that I don’t see clearly addressed is that with the elimination of broker voting in most instances, hedge funds will find many easier targets by simply looking for companies with the lowest vote turnout. Should this be a concern for retail shareowners?
NOBO and OBO Classification
Shareholder Communications Coalition: Eliminate NOBO/OBO. Anonymity, if desired, through nominee account or 3rd party vendor. Communications with beneficial owners only “for purposes involving the corporate or business affairs of a company,” which I read as today’s process.
The Altman Group: Eliminate the distinction between NOBO and OBO and to create a new unified category of ABO (i.e., All Beneficial Owners) with regard to record dates for votes at companies’ annual or special meetings, corporate actions (such as rights offerings), exchange offers and tender offers as well as for required and voluntary regulatory mailings by mutual funds and other issuers. The ABO system would apply all securities, including debt and foreign depositories. By limiting access to the ABO to a few days each year, the new disclosure system won’t become primarily a device used to track trades.
Comment: The SCC process would continue the current tilt favoring entrenched managers. The ABO proposal would appear better but still would favor entrenched managers and boards, since only shareowners involved in an actual proxy contest, where they are soliciting shareowners, would have access to the list, whereas the company would have access during any election cycle. It is critical, especially under proxy access, that shareowners have equal access. Has the idea of moving all stocks to the Direct Registration System (DRS) been explored? Under that option the investor is registered directly on the books of the transfer agent without the need of a physical certificate. The investor receives a statement of ownership and periodic (at least yearly) account statements. Dividend or interest payments, proxy materials, annual reports, etc., are mailed from the issuer or its transfer agent. Because the shareowner is listed on the company’s books, they no longer need to obtain letters from their broker when filing resolutions and can more easily assign their proxy voting rights to others.
I initially thought that one of the major strengths of the proposed ABO system is that, because access is limited to a few days each year, it can’t be used to track trading strategies. However, a two-week or even a two-month delay in disclosure could minimize concerns about revealing that investing strategies before parties could complete plans to buy or sell large positions.
The privacy afforded to beneficial owners by current rules comes at too a great cost. The system must require full disclosure, without devices that allow protection of privacy, such as nominee accounts. According to J. Robert Brown, Jr., “nominee accounts have bee used to manipulate stock prices, facilitate insider trading, circumvent the anti-stabilization provisions of rule 10b-6, the bona fide purchase requirement of rule 10b-9, and the registration provisions in Section 5 of the Securities Act of 1933.” (The Shareholder Communication rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?, Journal of Corporation Law, Vol. 13, p. 683, 1988. Available at SSRN: http://ssrn.com/abstract=993866)
Although Brown doesn’t discuss it in his paper, we can assume that rules make it difficult or impossible to identify shareowners also facilitate tax evasion, something we should all vigorously oppose. While we unclog the proxy plumbing, shouldn’t we also make it more difficult for criminals to hide?
Disclosure of ownership also encourages companies and shareowners to communicate directly, building bonds, loyalties, and long-term shareowners. According to Brown, “the Commission apparently refused to permit direct mailing of proxy materials in part because of perceived constraints imposed by state law. With only record owners having the power to vote, the proxy card could not be sent to street name owners but had to be sent to the broker or bank with title to the shares.” He goes on to point to several exceptions, which lead him to conclude the “stated rationale for the restriction is not compelling.”
Right now and under both competing recommendations analyzed here, shareowner lists must be used “exclusively for purposes of corporate communications purposes.” Interpretive releases clarify the meaning of that phrase. An issuer can’t recoup the acquisition costs of a shareowner list by selling it. Use of the list for product sales is prohibited. A bank, for example, can’t use a list to solicit loan or credit card business. Manufacturers can’t use the lists to offer street name owners discount coupons. “The restriction seems at best unnecessary and at worst unenforceable, perhaps even unconstitutional.”
What was the rationale? Again, turning to Brown: “The restriction seemed to have been imposed in part in an effort to minimize the possibility of competitive harm to brokers and banks. A list identifying the broker holding the shares, might have been sold to a competitor. Another bank or broker could use the list to lure away customers.”
The right to avoid unwanted calls or spam is better handled through “do no call or contact lists” where you have no relation to the company, other than the fact that your company may have sold your name on a list. Attempting to make use that contact and continued harassment should result in fines and penalties, where such contact has been clearly labeled as unwanted. Where shareowners do have a relationship with a company, because they are shareowners in the company making the contact, the company has an additional incentive to please. Most reputable companies facilitate the ability of potential customers to get off their mailing lists. We can anticipate the companies will provide shareowners with mailing list options such discount offers, company news, political concerns, etc.
Of course, direct communications would be a two-way street. Shareowners getting frequent or even occasional e-mail from companies are also more likely to contact companies with ideas and concerns, ranging from product suggestions and complaints to potential shareowner resolutions. Much of the contact may seem like spam, but hopefully, the feedback will also provide companies with good information that will afford them a competitive advantage.
The investment horizon of a firm's shareowners impacts the market for corporate control. Target firms with short-term shareowners receive more acquisition bids but get lower premiums. Firms with short-term shareowners suffer long-run underperformance. Weaker monitoring allows managers to proceed with value-reducing acquisitions or bargain for personal benefits at the expense of shareholder returns. (Gaspar, Jose-Miguel, Massa, Massimo and Matos, Pedro P., Shareholder Investment Horizons and the Market for Corporate Control. Journal of Financial Economics, Forthcoming. Available at SSRN: http://ssrn.com/abstract=582061.)
In 1960, the average holding period for American publicly listed company shares was seven years; it shrank to two years by 1992, and seven and a half months for companies listed on the New York Stock Exchange by 2006. For companies listed on NASDAQ annual turnover was three times higher. In 1999, the shares of Amazon.com turned over every seven days! (Allaire, Yvan and Firsirotu, Mihaela E., Hedge Funds as Activist Shareholders: Passing Phenomenon or Grave-Diggers of Public Corporations? (January 27, 2007). Available at SSRN: http://ssrn.com/abstract=961828)
Short-termism has long been mentioned as a major problem in corporate governance. Options proposed to reduce ill effects and the trend, include:
· Time-phased voting and other Incentives to motivate shareholder stability. The Aflac corporation, for instance, still grants ten votes to shareholders holding their shares for 48 months or more. French companies often pay a “loyalty premium” in dividends. French shareholders also enjoy reduced rates of taxation on capital gains as a function of the length of their share ownership (the lowest rate is achieved after a seven-year holding period!).
· Granting the right to vote to a shareholder only after a specific period of time, say one year.
· Capital structures consisting of dual class of shares with different voting power.
· Fuller disclosure.
Of these, full disclosure of transactions and ownership seems to fit best in the current proxy plumbing effort. It makes possible a full audit trail in corporate elections, encourages shareownership (rather than shareholding) through relationship building, and is likely to discourage share lending, short sales and equity derivatives that decouple voting rights from financial interests in a firm.
Competition among Proxy Service Providers
Shareholder Communications Coalition: The current functions of beneficial owner data aggregation and proxy communications distribution should be separated. Issuers should be able to select a proxy distribution provider of their own choosing with prices established though open competition, not a fee schedule established by regulators.
The Altman Group: ”Issuers should be able to choose other parties with possibly more cost-effective approaches to handling mailings to shareholders as well as proxy mailings and tabulations, if they exist.” “Companies paying the fees for services should be able to undertake N&A and other mailings directly to beneficial owners, and mail proxy materials using a customized proxy form.” Otherwise, retail shareowners could face a very confusing universal proxy card (at companies involving proxy access). Any distribution process should be available to be audited by qualified third parties.
Comment: We are concerned that allowing issuers to select proxy distribution providers and to customize proxy forms will lead to a stacked deck where it is very easy for beneficial owners to vote as recommended by management but difficult to vote the way they want to vote. What investors find confusing is multiple proxy cards, not a universal card. Companies should not be able to tip the scales by designing “user friendly” proxy cards that “include a single vote option for the company’s nominees as a group.” Far less confusing would be a single universal proxy card, reflecting all issues to be voted on and all candidates listed in random order. Proxy access should be extended to all bone fide candidates and issues. Of course, there is no current groundswell in that direction. However, the current VIF is often confusing. It is probably designed by Broadridge to ensure easy scanning. I would bet ease of use by the shareowner is secondary. The exchanges and/or the SEC should design proxy and VIF formats that are user friendly but don’t that tip the voting scales to one side or the other.
Beneficial Owner List Compilation
Shareholder Communications Coalition: Maintenance by non-profit data aggregator selected by special committee of NYSE (composed of brokers, banks, issuers, institutional investors, individual investors and other identified stakeholders”) on 5 year terms, which would also set fees. Data obtained from brokers and intermediaries but no link maintained between them and beneficial owner. All intermediaries would be required to reconcile positions to total holdings at DTC. Equal access to list for communications involving “corporate or business affairs of a company” upon payment of NYSE approved fee.
The Altman Group: “The concept of an aggregator of shareholder information, which could make NOBO/OBO (or ABO) and record date information available to a variety of entities, including Broadridge, is one put forward by other commentators. We believe this idea merits very serious consideration by the SEC.”
Comment: none
Proxy Vote Counting and Tabulation
Shareholder Communications Coalition: No change to current practices but should include independent inspector of elections, “when necessary.”
The Altman Group: ”Issuers should be able to choose other parties with possibly more cost-effective approaches to handling mailings to shareholders as well as proxy mailings and tabulations, if they exist.” ”The records of transfer agents and other parties receiving and recording votes of registered owners are fully auditable.” However, “a clear audit trail is not generally available with regard to the VIFs received for street name accounts under the current system.” ABO would provide a clear audit trail. It would also address “overvoting,” since a complete list of owners, segregated by share amounts associated with each firm would enable companies to easily identify situations where brokers or banks identify more shares than DTSC records indicate are eligible to vote. “Empty voting” occurs when firms use borrowed shares, derivatives, and other transactions to influence votes, with minimal or even negative economic interest. Altman recommends: “Substantial differences in voting rights vs. disclosed ownership should, in itself, be subject to disclosure.” The SEC should encourage companies to inform interested partied in advance of annual meeting agenda items so that funds could recall shares out on loan.
Comment: I embrace Altman’s concept of a clear audit trail and encouraging companies to announce meeting agendas in advance so that funds can recall shares on loan. Another form of “empty voting” not mentioned in either paper that should be addressed by the SEC is “blank voting.” The SEC should enact the proposed rule changes found in Petition File 4-583. Even though "broker voting" has been repealed for shareowner resolutions and directors, if a shareowner votes one item on their proxy and leaves other items blank, unvoted, those blank votes are routinely changed to be voted as recommended by the company's soliciting committee.