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From Securities Regulation Daily, February 19, 2015

SEC roundtable attendees want more proxy participation from retail investors

By Amanda Maine, J.D.

Panelists at the SEC’s roundtable on proxy voting discussed strategies for increasing the participation of retail investors in the proxy voting process. According to Robert Schifellite of Broadridge Financial Solutions, 70 percent of street shares are owned by institutions, compared to 30 percent held by retail investors. When it comes to voting proxies, approximately 90 percent of these institutional investors participate, but only 30 percent of retails investors do so, he said. Even with technological advances, the number of retail investors involved in proxy voting is still slightly in decline. 

Efforts to engage retail investors. Lawrence Hamermesh of Widener University Law School said that voting is an important mechanism shareholders should use to hold companies accountable. Voting gives shareholders the opportunity to shape corporate policy, Hamermesh explained. Reena Aggarwal of Georgetown University agreed that increasing retail investors’ participation in proxy voting is important, but observed that participation should be informed, and should not increase just for the sake of more participation.

According to Aggarwal, many retail investors do not vote their shares because they believe their votes will not make a difference due to institutional investors owning a substantial amount of the shares. However, she noted that dissenting votes that do not amount to a majority can still influence corporate policy. Even proxies that garner only 20 to 30 percent approval can result in director turnover, she said. Former SEC Corporation Finance Director Alan Beller (now with Cleary Gottlieb) agreed, stating that “20 to 30 is the new 50.”

John Bajkowski, president of the American Association of Individual Investors, said that according to a survey of AAII’s members, retail shareholders do not vote because they feel that their votes have no effect on what the board of directors does. If they disagree with the direction the company is taking or feel that it is being mismanaged, they are more likely to simply sell their shares instead of voting.

Informing shareholders. Cornish F. Hitchcock of Hitchcock Law Firm noted that methods used by institutional investors to obtain information about proxy issues, such as internal research, the use of proxy advisers, and engaging directly with companies, are not available to the average retail investor. The proxies themselves may not be helpful for investors, he said, wondering if the same could be said of proxies that Dean Acheson once said about memoranda—that they are not to inform the reader, but to protect the writer. Hitchcock said that the Internet can be a perfect source to get information, especially if investors can personalize the information they receive.

Corporate Library co-founder Nell Minow said that “you can lead a shareholder to a lot of dense material, but you can’t make them read it.” To help educate retail shareholders on their rights and abilities to engage in the proxy voting process, it is important to communicate the urgency of the information itself, she said. Companies should make known to shareholders that it is expensive for the company if they do not vote. Companies can encourage “rationally apathetic” shareholders to participate by making them see it is worth their time, according to Minow.

Bajkowski said that most AAII members do not read the entire proxy statement. What they really want is summary data with bullet points.  Shareholders would rather see a director’s mission statement about their vision for the company as opposed to a resume of their past achievements, he said.  CorpGov.net publisher James McRitchie said that he has a small amount of money invested in over 100 companies and he does not read through every proxy he receives. He suggested that investors could benefit from seeing how other investors, such as CalPERS, vote on particular proxies, and this information could be part of a “push” on news feeds that investors consult when they check the stock price.

When asked what strategies her firm uses to engage retail investors, Donna Ackerly of Georgeson, Inc., a proxy solicitation firm, named several methods, including reminder mailings, toll-free numbers, robocalls to shareholders, town hall forums, blast emails, and websites.  While these strategies can be effective, she noted that they do cost money.

OBO/NOBO system. Under current SEC rules, brokers cannot disclose to a company the identity of beneficial owners who object to that disclosure (objecting beneficial owners/OBOs), and the company cannot contact OBOs directly. A company may directly contact shareholders who do not object (non-objecting beneficial owners/NOBOs). According to Niels Hoch, executive director of the Shareholder Communications Coalition, the OBO/NOBO system has outlived its usefulness. He would like companies to be able to have a list of their shareholders whom they can contact directly, where shareholders can still remain anonymous if they choose. SEC rules are holding back innovation in improving communication with shareholders, he said.

Schifellite noted that OBO shares are mostly institutional investors and investors with high net worth.  While the default position is NOBO, there is an increasing trend of individuals who want to be OBO because of privacy concerns. Schifellite observed that OBOs vote their shares at the highest rate, while NOBOs, who are primarily retail investors, vote at the lowest rate.

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