Locking Out Shareowners (For a Fee) – Majority Shareholder Rights

It is the most sin­is­ter de­vel­op­ment in fi­nance since robo-sign­ing of fore­clo­sure doc­u­ments: cor­po­ra­tions lock­ing share­own­ers out of their own an­nual meet­ings. The pre­text is in­ter­net tech­nol­ogy that sup­pos­edly al­lows share­own­ers to par­tic­i­pate “vir­tu­ally” in­stead. But the tech­nol­ogy breaks down, and com­pa­nies are sus­pected of using it to sup­press crit­i­cism. If a CEO has se­cu­rity guards haul a share­owner out of a live an­nual meet­ing, every­one no­tices. But what if that same CEO has a share­owner dis­con­nected from a “vir­tual” meet­ing …”We’re sorry to hear you had dif­fi­culty con­nect­ing to the meet­ing. Did you check with your In­ter­net provider?”

A sin­gle ser­vice com­pany is dri­ving this process. Called Broad­ridge Fi­nan­cial So­lu­tions (BR), they were spun off by ADP in 2007. They have a near-mo­nop­oly on mail­ing out, on be­half of cor­po­ra­tions, those plas­tic-wrapped proxy ma­te­ri­als that sprout in share­own­ers’ mail­boxes every spring. Each pack­age con­tains a Broad­ridge-as­signed con­trol num­ber for track­ing votes. Those con­trol num­bers have al­lowed Broad­ridge to morph from a print­ing and dis­tri­b­u­tion com­pany into the de facto tab­u­la­tor of most cor­po­ra­tions’ elec­tions. Broad­ridge-run elec­tions are not in­de­pen­dently au­dited. Share­own­ers sus­pect they are grossly in­ac­cu­rate—with nu­mer­ous lost and il­lig­iti­mate votes—but Broad­ridge claims oth­er­wise.

Cor­po­ra­tions run­ning vir­tual an­nual meet­ings need some means for their share­own­ers to con­firm their iden­ti­ties in order to log-in. In most cases, Broad­ridge’s con­trol num­bers are the only prac­ti­cal so­lu­tion, so Broad­ridge is largely mo­nop­o­liz­ing the busi­ness or run­ning vir­tual an­nual meet­ings for cor­po­ra­tions.

There are two ways to con­duct a vir­tual an­nual meet­ing. One is to allow for both live or vir­tual par­tic­i­pa­tion. Such meet­ings have been called “hy­brid” meet­ings. The other ap­proach is to bar share­own­ers from par­tic­i­pat­ing in per­son and to allow only vir­tual par­tic­i­pa­tion. Broad­ridge likes to re­serve the name “vir­tual” meet­ings for these, but that is sugar coat­ing. If a state uses lethal in­jec­tion to ex­e­cute pris­on­ers, we don’t call it phar­ma­co­log­i­cal pun­ish­ment. We call it cap­i­tal pun­ish­ment. Call­ing an an­nual meet­ing in which share­own­ers are barred from the room a “vir­tual” meet­ing em­pha­sizes means over ends. Let’s call those meet­ings what they are. They are “lock­out” meet­ings. If a com­pany bars its em­ploy­ees from the fac­tory floor, that is a lock­out. If the com­pany bars its share­own­ers from the an­nual meet­ing, that too is a lock­out.

The USPX has spear­headed share­own­ers’ re­sponse to lock­out meet­ings. In 2010, Intel Corp. (INTC) an­nounced plans to con­duct a lock­out meet­ing. We raised con­cerns with the com­pany, and they gra­ciously backed down. Intel has since con­ducted hy­brid meet­ings. Later, in 2010, Syman­tec Corp. (SYMC) an­nounced plans to hold a lock­out meet­ing. We sim­i­larly ap­proached them, and they un­gra­ciously ig­nored us. The USPX launched a let­ter-writ­ing cam­paign against Syman­tec that at­tracted na­tional media at­ten­tion. For 2011, Syman­tec re­verted back to a hy­brid for­mat. In No­vem­ber 2010, Broad­ridge con­ducted their own an­nual meet­ing as a lock­out, using their own tech­nol­ogy. I wrote a piece “Broad­ridge Smokes Their Own Dope” on how the tech­nol­ogy cat­a­stroph­i­cally failed dur­ing that meet­ing. Broad­ridge de­nies there was a prob­lem. If a tree falls in the woods and no one is there, does it make a sound?

Since the 2010 fi­as­cos of the Syman­tec and Broad­ridge an­nual meet­ings, large cor­po­ra­tions have shied away from lock­out meet­ings, but Broad­ridge con­tin­ues to suc­cess­fuy mar­ket them to small cor­po­ra­tions such as Ap­plied Min­er­als (AMNL), Her­man Miller (MLHR), Nu­trisys­tem (NTRI)  and Dy­naVox (DVOX).

Broad­ridge re­ported poor fi­nan­cial re­sults for 2011. Per­haps it was to “juice” their vir­tual meet­ing busi­ness that they re­cently formed a “work­ing group” to de­velop best prac­tices for con­duct­ing vir­tual an­nual meet­ings. I have al­ready re­ported how, when Eliz­a­beth Mo­z­ley of Broad­ridge inivted me to par­tic­i­pate, I was torn. On one hand, Broad­ridge has a too-sub­stan­tial fi­nan­cial in­ter­est in the out­come for them to be or­ga­niz­ing such a work­ing group. On the other hand, It is im­por­tant to be will­ing to en­gage.

Eliz­a­beth arranged her own vir­tual meet­ing for the work­ing group to hash out ideas. Not sur­pris­ingly, the tech­nol­ogy failed, leav­ing sev­eral of us in In­ter­net limbo for a half hour as the meet­ing pro­ceeded with­out us. When I was fi­nally able to join the meet­ing, we had a sub­stan­tive dis­cus­sion on whether to ban lock­out meet­ings out­right and on what might be rea­son­able safe­guards for con­duct­ing hy­brid meet­ings.

A few weeks after that meet­ing, Eliz­a­beth dis­trib­uted draft guide­lines of the group. Let me be per­fectly clear. I did not par­tic­i­pate in writ­ing her draft guide­lines, and I am not aware that other par­tic­i­pants in the work­ing group did ei­ther. The draft guide­lines im­press me as some­thing Broad­ridge’s mar­ket­ing de­part­ment might cook up. Lit­tle of what was ac­tu­ally dis­cussed at the or­ga­ni­za­tional meet­ing is ev­i­dent in the draft.

The draft guide­lines were en­ti­tled Best Prac­tices to Pro­tect On­line Share­holder Par­tic­i­pa­tion in An­nual Meet­ings. And what spe­cific pro­tec­tions do they offer? Feast your eyes:

Checks and Bal­ances – In light of the fact that com­pa­nies con­trol the key pa­ra­me­ters of a share­holder meet­ing, the group be­lieves it is im­por­tant that there are checks and bal­ances for how an on­line meet­ing is con­ducted.

  • In con­sid­er­ing the adop­tion of an on­line share­holder meet­ing, is­suers need to weigh the cost of a phys­i­cal meet­ing, a vir­tual meet­ing, a hy­brid meet­ing and the rights of share­hold­ers—all is­sues con­sid­ered ac­cept­able for a com­pany’s de­lib­er­a­tion. Which op­tion will in­crease cor­po­rate gov­er­nance ini­tia­tives, share­holder en­gage­ment and vot­ing par­tic­i­pa­tion?
  • Guide­lines should be es­tab­lished for hy­brid meet­ings, as well as vir­tual only meet­ings.

Stated an­other way, the draft guide­lines re­quire of cor­po­ra­tions no pro­tec­tions what­so­ever.

On the topic of cor­po­ra­tions screen­ing out share­owner ques­tions they don’t care for, the guide­lines say that is fine:

… ques­tions that are ma­li­cious or friv­o­lous in na­ture can be ex­cluded at the dis­cre­tion of the com­pany

With­out any in­de­pen­dent over­sight and no trans­parency, cor­po­rate ex­ec­u­tives can in­ter­pret “ma­li­cious or friv­o­lous” any way they like, and Broad­ridge’s tech­nol­ogy will pro­vide the DELETE but­ton.

Jim McRitchie wrote up some crit­i­cal com­ments on the draft guide­lines, but he couldn’t e-mail them to the group. He noted:

Per­haps it was sent pre­vi­ously but I can’t find a list of par­tic­i­pants. We might make more progress if we can more eas­ily cor­re­spond with each other be­tween meet­ings …

Not only is the work­ing group not writ­ing its own guide­lines, but Broad­ridge doesn’t tell us who are the other work­ing group mem­bers. This is a farce. The fact that a com­pany that would treat us this way is pe­ti­tion­ing our own cor­po­ra­tions to run “vir­tual” an­nual meet­ings is alarm­ing.

On the im­por­tant topic of whether com­pa­nies should even be con­duct­ing lock­out meet­ings, Broad­ridge’s draft guide­lines had news for us:

… be­cause of the wide range of views of the par­tic­i­pants, the fol­low­ing are prin­ci­ples, or guide­lines, that the group gen­er­ally agrees should be con­sid­ered to the ex­tent that a com­pany de­cides to con­vene a … [lock­out or hy­brid an­nual meet­ing]

I do not be­lieve cor­po­ra­tions should be con­duct­ing lock­out meet­ings. Whether or not I agree with the guide­lines Broad­ridge ul­ti­mately pro­duces in our names, I will cer­tainly not agree that those guide­lines be used for lock­out meet­ings.

I am not going to be used. Note to Eliz­a­beth: I re­sign from your work­ing group.

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