Despite increased availability of electronic voting, it might be wondered why shareholders continue to hang on to paper proxies... and why companies let them
When Investor Relations looked at electronic proxy voting last year we discovered the practice had begun to catch on in the US and was on the verge of catching on in the UK and elsewhere. Since then the trend has continued. This proxy season there were more companies than ever that gave their shareholders the choice to vote electronically and posted proxy and annual report materials on the internet. More shareholders consented to access proxy materials through the internet, thus saving companies the cost of printing and mailing. At first glance it would seem the whole world is now dialing in and logging on to cast their votes and chucking their paper proxy cards into the recycling bin.
Not so fast. Before everyone starts congratulating each other for digitizing the proxy process - and reaping the supposed benefits of cost savings and improved efficiency - some numbers are in order.
According to this year's annual survey of US companies by Rhoda Anderson Associates, the last proxy season saw only 421 US companies make proxy materials available to their registered shareholders over the internet. About 1,300 companies offered their registered holders the choice of voting by telephone or the internet. These numbers were up significantly from the previous year but can they really be considered a victory? 'Out of a potential 14,000 companies, the percentage is pretty small,' notes Anderson, president of her eponymous consulting firm.
When it comes to beneficial - or street-name - shareholders, ADP Investor Communications Services acts as the intermediary between US issuers and most banking/brokerage clients, making electronic voting available to all. Still, a surprisingly small amount of shareholders cast their e-votes. About 12 percent used the telephone this year and about 10.5 percent used the internet, Anderson's report shows, and the numbers were consistent with last year's.
Outside the US the global transfer agent Computershare shows that about 19 percent of its UK clients offered internet voting this year, and the average percentage of votes cast via the internet was just 1 percent.
So while electronic voting and proxy materials promise to give issuers huge cost savings and greater efficiencies, unless more issuers offer these choices and actually make efforts to encourage shareholders to embrace them, companies can only experience marginal benefits over the traditional paper-based system. In the past two years electronic proxies haven't exactly taken off, though they are still warming up their engines on the runway.
The big question is, why is this electronic migration happening so slowly? For one, each issuer has to buy into a system capable of handling electronic voting and document distribution. Whether this system is coordinated by the issuer itself or a third party, it has to be seamlessly integrated with the shareholder registry and the hard-copy proxy system. This may sound obvious but as Peter Swabey, Lloyds TSB Registrars' manager of business development, points out, the work involved in setting up this system can be enormous.
Look at the UK oil and petroleum giant BP, for instance, which Swabey says gets a quarter of a million proxies back from its shareholders each season. 'You've got to be prepared to receive the paper in that volume and you've got to set up a separate system for the electronic. It's only those companies with very large registries that have been able to clearly cost-justify doing that. It's a question of reaching critical mass before it's practical for all companies to go down the electronic route.'
Time is also an obstacle, suggests Mary Ann Butera, ADP's senior vice president. She says when it comes to finishing their annual reports and proxy statements, companies often continue working until their printer's final deadline, and to ask them to go one step further and make those documents available in electronic form is simply asking too much. Many companies end up surrendering, saying, 'I know this is going to save money but I just can't deal with it. We'll try to do it next year,' she says.
According to Charlie Purcer, president of CJ Purcer Associates, companies that hurry to get their materials online often end up shooting themselves in the foot. 'They do it the least expensive way, which is user unfriendly, which in the long run discourages people from ever wanting to use it to get information,' he says, adding, 'What they manage to do is meet the SEC guidelines that say that they can put it up there, but usually they use a PDF format, which takes a long time to download and is difficult to navigate.'
Technology barriers, such as confusing navigation, unclear instructions and broken links, can also make it difficult for shareholders to vote electronically. While the large transfer agents in the US have introduced technologies capable of handling significant e-volume, this is not entirely true of their European counterparts, says Yvonne Stevens, company secretary and research manager of UK-based Manifest, a voting agent for pension funds, institutional investors and unit trusts. 'The problem we have with the registrars' systems as they stand is there's very few of them that are ready to accept an electronic proxy.'
Manifest accepts voting instructions via e-mail, fax, or phone, and then issues a written proxy for its clients. 'We're waiting, really, for a final go-ahead from the registrars. As far as we are concerned our systems are ready to run on a purely electronic basis,' Stevens explains. But until the major registrars begin to fully implement their technology - which she hopes will happen before next year's peak season - there cannot be a large-scale migration towards electronic voting.
Add to the mix some regulatory barriers and the diversity of voting systems from region to region, and you begin to understand why electronic voting has been slow in taking off.
Most to gain, most to lose
Yet the party that has the most to gain or lose, and is in the best position to help or hinder electronic voting, is the issuer company itself. According to Anderson's report, 'Issuers are passing up significant savings and are not offering their [shareholders] the information that they are seeking. Now that electronic voting and distribution are here to stay, it is in all issuers' best interest to investigate which method is best for them and to offer it to their registered shareholder base.'
Purcer agrees: 'Companies themselves are going to have to get a little more aggressive in urging people to vote electronically. They can make instructions clearer. They can send out instructions with a quarterly check prior to the annual meeting. They could say, We would appreciate if you voted electronically - it saves us money and the vote is recorded quickly. It takes little things like that.'
Purcer, whose company provides shareholder meeting services, emphasizes ease-of-use: 'We focus on making telephone and internet voting very user-friendly. We tell them voting electronically is very easy to accomplish.' Purcer has designed voting instructions to be as clear and user-friendly as possible. They even go so far as to explain exactly what voters will hear and what they will be asked to do when they call to vote by telephone. 'If you just give people instructions that say, Vote by telephone by calling this 800 number and follow the instructions, they immediately think they are going to have to go through a menu. We all know that nobody likes to go through a menu. Whereas if we tell them exactly what they will hear, they realize it's easy and they'll be more inclined to do it.'
Phil Bickel, CMS Energy's assistant secretary and director of investor services, has been aggressively trying to get his shareholders to vote electronically. And for each of the past four years his success rate has increased. During the most recent proxy season more than 53 percent of CMS's total vote came in electronically. That includes employees voting in conjunction with their 401K. Among registered shareholders, 49 percent used electronic voting methods. These numbers are far above industry averages yet Bickel admits, 'I really wanted 50 percent.'
During the first year it offered e-voting, CMS had about a 38 percent success rate. 'We've become more proactive and we strongly encourage people to vote electronically,' Bickel affirms. 'We have an insert we put in with each set of proxy materials and on one side of the bright green paper - we chose the color that jumped out the most - it says, Save money and save time! It tries to make it clear that it is a simple process.'
Bickel does everything he can to convince people that paper-based voting is the least desirable option. 'We write the instructions as politely as we can, but they have a subtle message that implies you're really kind of old-fashioned if you're not going to vote electronically. It says, If you do not have access to a touch-tone telephone or the internet please complete the proxy form below and, If you vote by telephone or internet please throw away this card.'
Bickel admits when it comes to CMS's employees, he's 'even more pushy.' Last year he gave employees a voting card without a return envelope, which prompted some to use the telephone or internet instead. This year he didn't even give the employees an option to vote by a card. 'With employees you can do things you can't do with registered voters. You don't have to provide them with a written opportunity, so the rules are a little bit different in terms of what has to be provided.'
Bickel hopes to surpass the 50 percent mark next year and he has already begun thinking of ways to improve his efforts - 'without violating SEC rules. We'll talk about the savings for the company, which translates as savings for them as the shareholders. We're just going to keep hammering away at these ideas.'
Helping issuers help themselves
Meanwhile issuers can get some help from service providers to help give electronic proxies a push. In the US ADP has started helping companies get proxy materials up on to the web. This past season the Long Island, New York-based service provider singled out the companies with the most beneficial stockholders, and for any of those companies that didn't have their proxy materials on the web ADP scanned and posted the material for them.
ADP is also aggressively doing away with redundant mailings caused by individuals receiving multiple proxy packages. Mary Ann Butera cites an example where the same person may have four different accounts - one as an employee, one through a 401K, one through an individual retirement account (IRA) and a fourth as part of a personal portfolio. 'You would be surprised how many people have many different accounts. We see this all the time when we compare a company's registered and beneficial shareholders,' she explains.
'Anything we can do on the internet to try and get more and more investors to sign up for e-delivery is going to be better for everyone.' Getting investors to accept company material digitally can help to correlate databases. Also, since sending out duplicate e-mail messages costs companies far less than mailing out duplicate proxy packages, e-delivery goes straight to the bottom line.
Quite. ADP claims to have eliminated over 40 mn proxy packages using e-delivery this year. It estimates the actual savings in delivery of proxy materials to have been over $38 mn.
Meanwhile in the UK, the settlement system Crest is working on enhancements to its existing technologies to facilitate e-voting. The new system will provide notification of issuers' meetings, the ability to submit proxy materials, the ability for a voting service provider to submit proxy instructions on behalf of registered holders, and notification of the meeting results. Crest predicts the changes should be implemented in January 2003, in time for the voting season. The Crest system will facilitate the domestic UK market with a view to extending to international securities.
'Crest is effectively providing a conduit or an additional means for the submission of proxy votes. It isn't replacing the duty of the company to send out the documents to the shareholders - that's still entirely the responsibility of the company. What Crest is saying is that at the moment the shareholders can return the proxy by paper, via the internet, telephone or fax,' Peter Swabey observes. 'Hopefully the Crest network will make things easier, because the easier the system, the more likely investors are to actually use it.'
Last year we wondered if paper proxies were on the way out. That is currently not the case. But in the next couple of years, with a consolidated push from issuers and their service providers, it just may be.