January 29, 2020 Agenda Week: Individual Investors Don’t Vote Unless Heavily Solicited
By Tony Chapelle, January 21, 2020
Individual investors vote fewer than a third of the corporate proxy shares they own, absent strong measures to stimulate voting. That’s because retail shareholders just don’t realize they can significantly impact corporate decisions, according to a recent study by Broadridge Financial Solutions, which handles the vote services for half of all public companies and mutual funds globally.
Virtually all market participants say they want individual investors to vote more. Yet while corporations occasionally might stimulate individuals by improving technological ease or running promotions to donate to charity in voters’ names, the best solution is being held hostage, according to many experts.
Current Securities and Exchange Commission rules make it difficult for companies to reach retail investors to encourage them to vote — and certain parties have a vested interest in keeping it that way, they suggest.
“Broadridge … has an interest in preserving the fee income and cost reimbursements it receives under the current framework,” warned the Council of Institutional Investors in a 2010 report. The CII pointed out that Broadridge is essentially the sole agent for intermediaries and companies. One Fortune 500 director who spoke on condition of anonymity insists that the rules won’t budge because Broadridge lobbies the SEC hard to maintain them.
The head of proxy solicitation firm The Altman Group had some choice words for the company and the system. In an article in 2009, Kenneth Altman stated, “Broadridge has a virtual monopoly position with regard to the distribution of materials and the tabulation of votes from clients of brokerage firms and banks. [C]orporations and retail shareowners are [not] well served by a monopolistic system that uses … nonmarket rate pricing, and places unnecessary distance between the votes of shareholders and the corporations or dissidents who need or want those votes.”
he head of corporate communications at Broadridge, in an e-mail, responds that the company “sends communications to NOBOs and OBOs, consistent with their preferences. As per the rules, Broadridge forwards proxy- and non-proxy communications to all shareholders and/or to segments of shareholders.”
The spokesman, Gregg Rosenberg, continues by writing that Broadridge sends out proxy communications efficiently and quickly through a variety of digital channels. “Moreover, over the past year, approximately half of all corporate issuers chose to partner with Broadridge to provide communications to their `registered’ shareowners who hold shares directly with the firms.”
But critics say the current system of proxy voting inhibits communication, mostly because objecting and non-objecting beneficial owner (OBO-NOBO) rules put up barriers between boards and shareholders.
An SEC investor advisory committee last September submitted four broad recommendations to the regulatory body to improve the proxy voting system. Ending the OBO-NOBO rule was not one of them.
The SEC has rules against allowing corporations to communicate directly with a large chunk of their shareholders by keeping them unknown. Issuers communicate with retail shareholders mostly through broker or bank intermediaries. Unless a person explicitly identifies as a non-objecting beneficial owner (NOBO), the intermediary is prohibited from disclosing the underlying stock owner’s identity and shareholder contact information.
In addition, the company cannot contact objecting beneficial owner (OBOs) directly. Even so-called NOBOs who agree to let companies or their agents contact them directly have to be reached or have their votes cast through intermediaries.
This privacy originally was meant to shield individuals from a deluge of direct marketing and harassment. Many insiders, however, maintain that the rules support Broadridge’s business model and that of brokers and banks that send out proxy materials.
“[The United States has] a Rube Goldberg model compared to other countries,” the board member charges. “If we used other countries’ model, most [shareholders] would be in the directory, unless they chose not to be. Most people don’t care if you know who they are. But if we did go to a registry, it would put Broadridge out of business.”
The National Investor Relations Institute (NIRI) complains that it’s been trying along with others to change these rules. “The SEC needs to update the outdated rules that govern proxy distribution and voting and remove barriers to issuer-investor communications so that companies and their boards can more effectively communicate with individual investors,” writes Ted Allen, NIRI’s vice president for communications and member engagement. NIRI is part of the Shareholder Communications Coalition, which has been urging the SEC since 2009 to repeal the OBO-NOBO rule. Allen explains that the requirement significantly increases the cost to reach investors and decreases competition to provide proxy distribution services.
The question of just how important retail investors are is a subject of debate among governance experts. Only about 30% of shares in the U.S. are held by individuals. Yet they occasionally make the difference in whether a director gets seated or which side wins in a proxy contest.
For instance, last year, retail investors were far more likely than institutional investors to have voted for the 478 directors in the U.S. who didn’t win majority support. In reviewing the 2019 proxy season, Broadridge and audit and management consulting firm PwC found that those board members had received just 30% support from institutional shareholders; 77% of retail shareholders in those elections had voted for them.
As a matter of good governance and to protect the interests of minority shareholders, how could boards improve turnout? Broadridge offers at least three suggestions based upon the survey.First, individuals need to be reminded to vote. More than three quarters of investors who were surveyed last May said they wanted their financial advisor to nudge them with either an e-mail, text message or phone call.Another suggestion: Make proxy statements simpler. Respondents said that proxies are too complicated. Three quarters of individuals surveyed admitted they were not willing to spend more than 10 minutes on voting.Finally, make it easier. Seventy-seven percent of millennials and nearly half of baby boomers surveyed said they’d prefer to use a mobile app to vote if one was available.But Allen at NIRI pushes back on how much difference the conveniences would make.
“While technology, such as mobile apps, and e-mail reminders would help improve turnout, NIRI takes the position that these technological changes won’t be truly effective until the U.S. proxy system is modernized,” he concludes.
Bruce Goldfarb of proxy solicitor firm Okapi Partners says the one big challenge that boards face in drumming up investor interest is obtaining contact information.
“In our experience, most retail shareholders require direct contact from companies they own in order to vote,” writes Goldfarb. His solicitation company has been a communications pipeline in a number of major corporate proxy contests in recent years. One of them was the 2017 battle between his client — hedge fund Elliott Management — and Arconic, a lightweight metals manufacturer. Okapi created an unusual campaign built on sending out video mini-players to thousands of individual Arconic investors. The players presented a four-minute message endorsing Elliot’s dissident director slate. The actual mailing, however, was handled through Broadridge.
After the video players landed — at great expense; one estimate was a million units at a cost of two dollars per — and the dust had settled, Arconic agreed to give Elliott three seats.
Yet most large companies don’t have a large retail share base, says Allen. So they have less incentive to spend large sums of money on robust campaigns to induce individuals to vote.
Peggy Foran, who chairs the sustainability and shareholder engagement committee at Occidental Petroleum, laments the fact that what she describes as “very few” registered shareholders vote. There are a variety of reasons.
Sometimes they don’t know what they’re getting, Foran says, while sometimes they think their few shares aren’t going to make a difference. “And it’s expensive with the OBO-NOBO system. It makes it very difficult because they’re viewed as ‘owned’ by the brokerage firms.”
Foran is chief governance officer and corporate secretary at Prudential Financial. Eight years ago, she oversaw a program to give away eco-friendly shopping bags to shareholders in order to get them to vote. “[The increase was] higher than before, equivalent to hiring a proxy solicitor firm that would bother you several times while you were having dinner,” she says.
Bank of America also has an incentive program; last year, the company shelled out a $1 charitable donation to the American Red Cross on behalf of every stockholder account that voted its proxy. In 2018, it made the same donation per investor to Habitat for Humanity for a total contribution of $919,000.
“We all have done the plain English, we’ve done things digitally, and we’re trying to connect with the shareholders the best they can,” says Foran. “But it’s still not a very high rate.”
Charles Elson, chairman of the nominating/corporate governance committee at Encompass Health, voices the widely held belief that boards all want their investors to vote. “Small investors don’t believe their votes count, when in fact they do.”
Indeed, he equates the proxy vote in some ways to the public ballot. “I’ve always thought that one of your obligations as a citizen and as a shareholder is to vote. You can’t complain if you don’t vote.”