By T.L. Montrone, Chairman, President and CEO of Registrar and Transfer Company
The SEC solicited comments on ways to improve Notice and Access (“N&A”) through a proposed rule-making published earlier this year. Concerned with the drastically reduced retail shareholder voting rates experienced using N&A, SEC Commissioner Aguilar called on the SEC to “fix it [N&A] or scrap it”. But N&A isn’t the only reason retail voting has plummeted over the past 20 years. The movement of shares into street name, the confusing NOBO/OBO rules, generic voting forms and costly artificial barriers between issuers and beneficial shareholders have all played a pivotal role in the steep deterioration of retail shareholder voting. This begs the question: Shouldn’t the SEC focus on fixing beneficial shareholder voting and the street proxy system before considering Proxy Access or other major changes to the proxy rules? There are ways to fix N&A to regain retail shareholder voting, but this only addresses a small part of the problem. The falling retail voting percentages generated by N&A should be a concern, but redressing the current abusive street proxy structure should be even higher on the Commission’s proxy priorities.
First – Fixing N& A: Analyzing Retail Voting
Registrar and Transfer Company performed analyses of registered voting trends for the same companies, year-to-year, that used various approaches to N&A. The number of registered shareholders voting declined precipitously when N&A was used, if the issuer mailed only one Notice. This was the least expensive approach, but it also generated the worst results in terms of the number of registered shareholders voting, with some issuers experiencing a drop of more than 70%.
Companies that sent a second Notice with a proxy card didn’t appear to experience significant decreases in the number of registered shareholders voting. In a few cases, these companies even saw the percentage of registered shareholders voting improve! The contrast in the number of registered shareholders voting between companies sending a single Notice and those that sent a second Notice with a proxy card appeared compelling. When the card and second Notice was sent, the number of shareholders voting decreased in most instances, but the decline was almost always minor. Here are a few of the representative statistics of the percentages of registered shareholders voting when issuers used this tactic: 17.5% voting increased to 32.4% and 38.9% to 40.2%: 36.6% went down to 35.1%; 47.4% to 39.8%; 51.1% to 43.2% and 25.3% to 23.3%. We should note that the overall voting totals did not change significantly for most companies due to N&A, since the number of shares in street name and discretionary voting buoyed the results.
Fixing N&A: Alternatives for Consideration
To improve retail-voting percentages while retaining the benefits of N&A, the SEC should consider permitting issuers to send a single Notice with a proxy card and BRE. They could also require a short summary proxy statement describing the issues to be voted on (as stated in the full proxy statement) and instructions describing how to access or receive the full proxy materials. The short statement should encourage shareholders to view the full proxy material before voting, but not require them to do so. This would retain most of the benefits and give those retail holders that have the initiative and interest the ability to review the full proxy statement if they care to do so.
But What’s Really Wrong with Today’s Retail Voting???
The percentage of registered shareholders voting is typically far greater than the 20% of the street retail shareholders voting before N&A was introduced. Under N&A, the street reported that only 13% of the retail shareholders voted. Why the dramatic difference in retail voting between the street and registered holders? Maybe registered shareholders have a greater affinity for the issuer. However, low retail voting is more likely directly correlated to the formats and branding used by the street vis-à-vis the customized branding used by issuers with registered shareholders. Using a generic Voting Instruction Form sent in generic mailers is less likely to stimulate responses from many “mom & pop” retail shareholders. The street process, besides being far more costly for issuers, usually fails to treat issuers as customers and uses a mass production process that fosters a disconnect between the issuer and beneficial retail shareholder.
The Shareholder Communications Coalition, of which the Securities Transfer Association and, by extension, Registrar and Transfer Company are members, have been zealous in their pursuit of real solutions to street proxy maladies including fixing retail voting through issuer-access to beneficial holders. The NYSE is taking up this topic as this goes to press with the re-formation of the Proxy Working Committee (PWC). The PWC met in the past to explore the proxy process and, unfortunately, repeatedly failed to address the Achilles’ heel of the proxy process: the lack of accountability and issuer control of the street proxy distribution system. The street process perpetuates the confusing NOBO/OBO structure. It fails to require pre-reconciliation of voting rights resulting in continued distribution of voting rights in excess of the shares outstanding. The system is opaque, making it impossible to ascertain if legitimate beneficial votes have been recorded and it fails its basic mission to protect the legitimate voting rights of beneficial holders.
Additionally, the system is costly, based on an anti-competitive, non-contractual process that becomes an obstacle rather than a facilitator to beneficial retail voting. Stock lending and other systemic failures can continue, unfettered, without the basic essential requirement to reconcile and register voting rights. The current excessive compensation and lack of accountability might be the primary underlying reasons why the system hasn’t, in these many years, been corrected. This system perpetuates the disenfranchisement of beneficial retail shareholders and, until it is corrected, their voting percentages are likely to remain anemic.
It is clear that N&A has eliminated a vast amount of economic and environmental waste without irreparably harming shareholders. It is also clear that the N&A system can be improved to give shareholders a better opportunity to vote without greatly increasing the cost or reducing the access to the proxy statement. Further, more companies would use N&A, reducing environmental
waste, if the SEC shortened the mailing-to-meeting requirement to 30 days. However, it is equally clear that the Commission should address the inappropriate and predatory business model for the distribution of beneficial voting rights that continues to abuse American businesses and the proxy rights of legitimate beneficial retail shareholders. The real message to the SEC and the PWC should be to fix the street proxy system by requiring transparency, street reconciliation and disclosure of beneficial holder proxy record positions. By granting access, the PWC can rejuvenate retail voting, give shareholders real registered rights and redress an inappropriate abomination of a street proxy distribution system.
Thomas Montrone is Chairman, President and CEO of Registrar and Transfer Company. He is a former president of and a current member of the Securities Transfer Association Board of Directors and co-chair of the STA Proxy Committee. You can view the full SEC Comment Letter prepared by Tom by going to the R&T website, www.rtco.com Proposals by the Shareholder Communications Coalition can be viewed at www.shareholdercoalition.com
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