A coalition of major investor groups has called on the SEC to take action to avoid a repeat of what it says was a proxy season dominated by virtual AGMs that were a ‘poor substitute’ for the usual in-person events.
Health and safety considerations arising from the Covid-19 pandemic have led most US companies to switch to a virtual format for this year’s shareholder meeting. In a letter to SEC chair Jay Clayton and division of corporation finance director William Hinman, the groups – Ceres, the Council of Institutional Investors, the Interfaith Center on Corporate Responsibility, the Shareholder Rights Group and US SIF: The Forum for Sustainable and Responsible Investment – acknowledge the highly unusual situation facing companies and welcome the SEC’s April 7 guidance on virtual meetings.
They also note the ‘substantial strain’ on many corporate secretaries posed by the short notice of making the switch to virtual meetings and the need to conduct them with management and board members in multiple locations.
But the groups argue that the swift change to virtual AGMs ‘led to considerable confusion and technical difficulties, in many cases inhibiting shareholder participation in meetings. We are concerned about the potential for poor precedents for conduct of shareholder meetings and, in some circumstances, deliberate actions that limited shareholder participation at various companies.’
They add: ‘Although we recognize that state law, individual companies and intermediaries must step up, we believe there are appropriate steps the SEC can take to help improve the situation.’
According to the groups, many institutional and individual shareholders faced obstacles in getting into meetings, asking questions and participating ‘in a meaningful way’. The coalition argues that when the pandemic risk subsides, companies should go back to in-person meetings, although it says hybrid meetings may be the best choice as virtual participation has some benefits.
A particular concern for the groups centers on shares held in street name, which they note includes the large majority of institutionally held shares. At some AGMs, they say, onerous steps were required to revoke proxy votes and legal proxies, with the key issue appearing to be that control numbers were not shared between providers.
The problem may be difficulties sharing those numbers because they may include personal identifying information (PII) but there should be an efficient way for intermediaries to share and protect PII at the same time, according to the groups. As a result, they say it may be necessary for the SEC to get industry participants to work out an efficient standard protocol, given competitive pressures between different firms.
The investor groups say another area where the SEC could help is the presentation of shareholder proposals. Although Rule 14a-8(h) requires that a shareholder present its proposal at the meeting, the authors say they are aware of at least one company holding a virtual AGM that did not allow proponents to do so. They also say that in some cases a shareholder proponent’s participation was limited by, for example, having to present in a virtual ‘room’ from which it was not allowed to participate in the general shareholder Q&A.
‘Exacerbated by the virtual meeting format, we saw numerous instances this season in which shareholders were unable to ask questions on a live basis, submitted questions that were not shared with other attendees at the meeting and sometimes saw company misrepresentations that no other questions had been asked,’ the groups write.
‘Company responsiveness and transparency relative to the [Q&A] period ranged from a transparent process of making the questions visible on a real-time basis and attempting a good faith effort to answer them, to cherry picking of questions and the issuance of canned responses.’
Given the potential for material questions to arise during the Q&A period, misleading or inadequate corporate disclosures related to those questions warrant the SEC’s attention, the groups say.
They add: ‘Best practice is for company directors and/or management to respond to all non-trivial questions in a transparent manner, such as on the company’s investor relations webpage, within a reasonable period such as three days following the meeting… To be clear, we realize that the SEC has a limited role, at most, in how meetings are run. But we believe the SEC should require clear disclosure about how shareholders can participate in meetings, particularly if shareholder questions and comments are to be limited.’
In addition, the groups expressed their support for webcasting AGMs to the public in that it helps bring consistent information to the market. They recommend that the SEC require or encourage all companies to conduct real-time public webcasts of their shareholder meetings.
In its April 7 guidance, the SEC states among other things that ‘[r]obust disclosures that facilitate informed shareholder voting are just as important for a virtual meeting or hybrid meeting… as they are for an in-person meeting.
‘[T]he staff expects the issuer to notify its shareholders, intermediaries in the proxy process and other market participants of such plans in a timely manner and disclose clear directions as to the logistical details of the virtual or hybrid meeting, including how shareholders can remotely access, participate in, and vote at such a meeting.’
A number of corporate secretaries and other governance professionals who have helped host virtual AGMs for the first time this year have reported that the process largely went smoothly, notwithstanding the challenges of preparing for an event for which they were not familiar with the technology involved. In some cases they also report higher rates of shareholder ‘attendance’ than at previous in-person meetings.