The results of online voting for the 1999 proxy season
Will investor relations officers give internet proxy voting the thumbs-up? In this year's proxy season, a few hundred publicly-traded US companies did just that, offering their registered investors the chance to exercise their shareholder rights by internet or phone.
The percentage of votes received over the internet roughly doubled over last year, and some investors even began granting companies consent to send annual reports and proxy materials electronically in the future.
Only where the internet is concerned can a 100 percent growth rate lead to Monday morning quarterbacking. IROs, transfer agents, and industry observers have been quick to point out that participation fell short of some very sanguine projections.
No big jump
Consultant Carl Hagberg of Carl T Hagberg & Associates sums up the prevailing sense of the 1999 proxy season: 'The numbers are up this year,' he agrees. 'But interestingly, I didn't see a big, big jump. I was quite surprised.'
One explanation for the sense of surprise and disappointment lies in the medium itself. When the yardstick is the internet, measurements quickly become hyperbolic.
Robert Williams, the investor relations manager at Dell Computer in Round Rock, Texas, points to the fact that there are now 100 mn internet users in the US, up from 5 mn in 1995. 'This is not just growth,' he enthuses. 'This is unbridled, incredible velocity.'
Yet Williams, too, acknowledges that internet proxy voting failed to live up to its potential this year. He now believes it's going to need a real push if it's going to truly take off.
Others are more positive, noting that the first internet proxy vote was only conducted three years ago, when McDonald's, Ameritech and First Chicago rolled out the brand-new service in 1996. The optimists also emphasize that companies offering internet voting – IBM, Intel, Boeing, Eastman Kodak, Wal-Mart – are all undeniably blue-chip and will influence others to follow suit.
Rich Vancil, chief operating officer at Direct Report Corporation, an electronic shareholder communications firm based in Maynard, Massachusetts, believes that the trickle-down has already begun. He reckons that online proxy voting has definitely now gone beyond the early adapters. 'There are fewer concerns about the legal and technical ends of this,' he says. And, for some, this year has seen smaller companies – especially in the high-tech realm – testing the electronic waters with internet proxy voting.
Votes are in
All told, around 500 companies offered registered shareholders the opportunity to vote their proxies over the internet in 1999, according to estimates by Tom Newton, vice president of e-commerce for EquiServe. EquiServe is transfer agent for some 1,500 companies, around 150 of which are offering phone or internet voting.
At EquiServe, 17 percent of those registered shareholders who cast proxy ballots voted electronically, Of those, roughly 7 percent were received over the internet and 10 percent by phone, according to Newton. Last year, 10 percent of the ballots that could have been cast electronically were in fact cast electronically, 7 percent of them by phone and 3 percent via the internet.
1999 was the second year internet proxy voting was made available through Georgeson's 'cybervote' product. This time around, a dozen of the firm's 100 tabulation clients offered an internet voting facility to their shareholders, up from three last year, according to David Sharp, manager of proxy tabulation services. Some 5-6 percent of votes received came over the internet, relative to 2-3 percent last year. Higher numbers, Sharp observes, were tallied at companies with employee plans that actively encouraged their own workers to receive information electronically.
Those investor relations officers who signed on for internet voting are now struggling to make sense of response rates. In Alltel Corp's first year of offering electronic proxy voting, explains Pamela Fisher, director of shareholder services, 63.7 percent of the company's shares were voted by mail, 1.9 percent by internet and 34.4 percent by phone. 'I was real optimistic but the results didn't come through,' Fisher laments.
Numbers might not lie, but they can certainly confound. Hank D'Ambrosio, vice president of administration for Bell & Howell, is a veteran of internet voting, relatively speaking. For him, 1999 was the third go-round. D'Ambrosio points out that in 1997, 25 percent of votes arrived via the internet, an overwhelmingly positive response owing primarily to a single institution that voted a large position online. In 1998, when that same institution opted for mail, fewer than 10 percent of all shares were voted by internet.
Street-side response
The number of companies expressly offering registered shareholders the alternative of voting their proxies via the internet may still be small, but Automatic Data Processing (ADP) has enabled every US publicly-traded company to conduct internet voting for investors who registered in their brokers' names (Street-name investors). These investors don't actually fill out legal proxies, but instead send voting instruction forms to their brokers, who then vote the shares accordingly.
Because Street-name investors complete instruction forms – not actual proxies – they can make their wishes known electronically in every state. Registered shareholders, who vote actual proxies, can only register their preferences electronically in the 20 states so far where non-written proxies have been made legally valid. From 1998 to 1999, ADP has seen a 385 percent increase in internet voting, and a 73 percent year-to-date increase in phone voting, according to Rich Specht, the director of sales for ADP.
Computer voting also whetted the appetite of institutions. Last year, the institutional votes passing through ProxyEdge – ADP's PC-to-PC system – rose 42 percent, says Specht. 'We're very pleased with the overall response,' he says. 'But it's an evolutionary process, as everyone agrees.'
For ADP, one sobering fact has been that many publicly-traded companies lack the wherewithal or even the interest to provide proxy materials and annual reports for online transmission. There's not much anyone else can do about that until companies catch up or decide that the cost-savings make it worth their while. 'The onus,' as Specht says, 'is on the corporation to provide that information in electronic format.'
Dollars and cents
One of the most compelling reasons for a company to offer internet proxy voting has to be the potential it offers for cost savings. But there's a catch here. Those savings only materialize once there is a critical mass of shareholders using the system.
An advocate of internet voting, Dell Computer's Williams, concedes this point. 'We have to use very long investment horizons to find cost savings,' he confirms. 'Internet voting costs us money at this point in the game. But it's the right thing to do for the future.'
Potential savings from internet proxy voting come in two stages. In the first stage, where most companies are today, IROs send out paper proxy materials with a written invitation to vote online. For every shareholder who casts a ballot on the net, the company saves 35-38 cents in return postage.
Savings are, of course, partially offset by costs. Hagberg estimates that investor relations officers pay around five cents for each internet vote, and 11-17 cents for each telephonic one. Beyond that, he says that transfer agents and third-party vendors charge an up-front set-up fee that cuts into the savings, especially for smaller companies which tend to have a more modest number of registered shareholders.
Voting dividends
The dividends of internet voting appear down the road, when individuals begin receiving proxy materials, ballots, and annual reports online. Dell's Williams calculates that it costs $6-10 per shareholder to print and mail out written materials – almost all of which is saved in a paperless system. There are roughly 1.6 mn shareholders at Dell. 'If we could do this electronically for cents, as opposed to dollars, the savings are big,' he says. 'Companies could save millions of dollars a year. And these are shareholder dollars.'
What companies find particularly embittering is that money spent on annual reports and proxy materials is often wasted. Eduard Van Raay, VP in the ADR product development department at JP Morgan, which will soon offer internet proxy voting for ADR issuers, says, 'Investors are not all anxiously awaiting the annual report and proxy card. You have to be realistic. Probably 50-75 percent of the mail goes into the garbage can.'
Shunning paper altogether, however, is not currently an option. The US SEC requires companies to get formal consent from shareholders before disseminating materials electronically. Newton, who's begun to gather consent for EquiServe clients after their shareholders cast internet votes, says, 'The perfect time to pique the interest of the investor is at the end of the proxy voting process.'
Consent levels are running high. When ADP asks shareholders currently voting on the internet whether they agree to receive materials electronically in the future, roughly 50 percent agree, says Specht. Not surprisingly, companies like Intel and Gateway have boosted consent levels even higher by sending written requests to all shareholders, making the case for why investors should embrace electronic delivery.
That said, the bottom line isn't the only justification for offering internet proxy voting to shareholders. Many companies feel it's an effective way of encouraging corporate democracy: shareholders can vote right up to the last minute without the danger of missing the cut-off date.
Global view
When it comes to internet proxy voting, the whole world is getting in on the act. In mid-March, E-Vote Limited, a London-based operation owned by Thomson Financial Services, initiated a pilot with around ten entities that handle nearly half of all the investment institutions in the UK. E-Vote is an end-to-end electronic proxy voting system, according to marketing manager Mary Ainley, meaning that it reaches every key player in the proxy process from company to registrar, custodian, and fund manager.
The process, according to Ainley, is cost-effective because only one person needs to fill in the proxy cards where three had to do so in the past. (Written proxies are still required in the UK). Electronic tallying also minimizes lost votes. 'In the mechanical process,' Ainley notes, 'there's a lot of room for votes to go missing.'
E-Vote will be live by summer, and has ambitious expansion plans. 'Most institutions,' she says, 'are keen for us to push it out globally.' And while E-Vote now targets institutions, Ainley is 'aware that we must launch something for retail investors quickly.'
One stumbling block is that electronic ballots are not yet legal in the UK. But Manifest, a voting agency for pension funds, institutional investors and unit trusts, is now accepting proxy voting instructions by e-mail, fax or phone. Founder Sarah Wilson explains that Manifest online is a direct modem-to-modem system that lets institutions complete a voting template, establishing decision-making parameters, such as sending a 'no' vote for all long-term compensation plans that lack challenging performance criteria.
Even sending voting instructions by PC is in its infancy in the UK, emphasizes Wilson: 'The numbers are tiny, tiny, tiny. It's only just happening.' Most institutions, she says, 'are still attached to the bits of paper.' But Wilson anticipates that the regulatory regime will be modified in the next two-to-three years, making true electronic proxy voting possible.
The future: yea or nay?
Regulatory hassles still remain, and the blissed-out economic predictions certainly haven't come true yet. But the industry remains generally upbeat about the future potential of internet proxy voting. EquiServe's Newton foresees participation levels doubling once again in 2000. 'Next time,' he says, 'we predict big-time growth.'
Those IROs most smitten with internet proxy voting are focusing on benefits besides cost savings. For Bell & Howell, image is the clincher. 'We consider ourselves a high-tech company and we think we ought to use high-tech tools,' says D'Ambrosio. He points out that internet voting has a certain cachet, and gives shareholders something active and practical to do on the internet. Anyway, he concludes, 'We're looking for any excuse to bring shareholders to the web site.'