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Apr 30, 2009

E-proxy backlash

E-proxies have not proved to be as cost affective as expected, moreover there has been a drop in retail voting

With the SEC’s e-proxy rules now in year two, some companies that waited on the sidelines to see how last year’s 653 early adopters fared still have no easy answers.

The turnout of retail voters for notice-and-access e-proxies was disappointing, giving pause to any company facing a controversial vote. But firms are determined to cut costs and, done right, e-proxy can shave money from high printing and postage bills associated with the annual proxy mailing.

‘There’s definitely a backlash over the drop in retail voting,’ says John Truzzolino, director of electronic solutions at RR Donnelley. ‘Issuers are wondering whether the often meager cost savings are worth potentially not communicating with shareholders.’

He adds that the highly contentious say-on-pay requirement for all Troubled Assets Relief Program companies is also prompting second thoughts. ‘As say on pay is a non-routine item, companies will need to get the votes,’ explains Truzzolino. ‘We’ve seen firms that had scheduled notice and access now decide to go full set.’

Bridget Hughes, director of products and services at Bowne, says her clients haven’t abandoned e-proxy, but some are considering a hybrid approach: sending the notice to some shareholders and the full set to others. In 2008 Bowne saw 10 percent to 15 percent of its issuer clients opt for e-proxy, and Hughes expects the number to double this year.

Chuck Callan, senior vice president of regulatory affairs at Broadridge Financial Solutions, confirms that the number of notice-and-access adopters is rising: it accounted for 11 percent of all shareowner distributions between July 1, 2008 and February 28, 2009, up from 8 percent during the same period a year ago.

When notice and access debuted, many companies feared an avalanche of shareholder calls demanding paper copies of the proxy and annual report. That didn’t happen, observes Rick Grubaugh, senior vice president at DF King, which owns financial printer kcomm. ‘The number of people requesting paper copies upon getting the notice is relatively insignificant,’ he says.

So how much did early e-proxy adopters save? Using NIRI’s estimates of average costs for printing and mailing proxy materials, Broadridge calculates that firms saved over $200 mn, after fees. But savings depend on the size of the shareholder roster.

‘Larger companies saw some cost savings in the first year,’ says Michael Scanlon, partner in the Washington, DC office of Gibson Dunn & Crutcher; these savings were, however, at the low end of expectations.

Truzzolino points out that cost savings for smaller shareholder rosters can quickly evaporate when all expenses are tallied. It might cost around $5,500 to print 10,000 proxy statements, but still cost about $3,350 to print just 1,000 full sets. And companies need to print and mail notices (9,000 notices could cost around $3,500), as well as pay a provider like Broadridge a suppression fee for those shareholders reached through e-delivery.

Boosting turnout
With e-proxy, the number of retail accounts that voted plummeted from 21.1 percent to 5.7 percent, according to Broadridge. In conjunction with other key players, Broadridge has redesigned the notice shareholders receive by mail, simplifying the instructions for accessing proxy materials and voting online. Companies concerned about turnout can send a follow-up mailing – an expensive but effective option.

Hughes advises against leaping into notice-only if a company hasn’t previously done phone or internet voting. ‘You should at least introduce an internet facility for a year or two before saying it’s the only option,’ she says. She also recommends including a letter about e-proxy with dividend checks.

Another way to encourage voter turnout is to go hybrid. The most common way, says Hughes, is to send a full set to registered shareholders and just a notice to street-name ones. A further option is to send a full set to shareholders who voted the previous year.

This proxy season, more companies may opt to send traditional hard copies to employees who hold company stock through a 401K or employee plan because of the Department of Labor’s Employee Retirement Income Security Act (ERISA) disclosure requirements under Section 404c, as full-set delivery meets ERISA requirements but notice and access may not.

Although e-proxy still has enormous room for improvement, it’s gaining an air of inevitability. ‘In five years, e-proxy will be standard operating procedure,’ predicts Grubaugh. ‘But unless we devise a mechanism that promotes shareholder voting, companies facing a non-routine agenda item will be forced to engage in extra solicitation efforts, and that means giving up a significant amount of savings.’