For most companies, annual shareholder meetings are non-events, with little to no shareholder attendance. That’s why the concept of virtual annual meetings—which allow shareholders to overcome the logistical and financial burdens of attendance in person—was originally viewed as a way to rejuvenate the concept of annual meetings. With virtual technology, large numbers of shareholders were suddenly able to attend meetings on their laptops. Ironically, however, it has been shareholders—the designated beneficiaries of the virtual annual meeting—that have raised objections to virtual-only meetings because they were viewed to insulate management and directors from shareholders, allowing management to avoid uncomfortable questions. (See this PubCo post and this PubCo post.) While the number of virtual-only annual meetings increased from 21 in 2011 to 155 in 2016 to over 212 in 2017, the criticism among some commentators and institutional holders has not abated: critics continue to contend that virtual-only meetings limit an important shareholder right, precluding shareholders from direct eye-to-eye engagement with management and the board. With that in mind, a group of interested representatives of retail and institutional investors, public companies, proxy advisors and legal counsel, known as The Best Practices Committee for Shareowner Participation in Virtual Annual Meetings, have developed a set of best practices designed to ensure that the needs of all constituents are satisfied—to “promote both the reality and the perception of scrupulous fairness.”
According to the results of the ISS 2017-2018 global policy survey, almost 20% of investors thought either virtual-only shareholder meetings (where the meeting is held entirely online with no physical location) or hybrid shareholder meetings (where physical meetings are supplemented by real-time audio or video, with a variety of types of online participation by shareholders) were acceptable, and 8% thought neither were acceptable. However, 36% were fine with hybrid meetings, but not virtual-only shareholder meetings, and 32% were fine with either, so long as virtual-only meetings afforded the same shareholder rights as physical meetings. Among non-investors, 42% viewed either virtual-only or hybrid shareholder meetings to be acceptable without reservation. Many non-investors, however, did not agree with that view, with 22% finding hybrid meetings acceptable, but “virtual-only” meetings acceptable only if they provided the same shareholder rights as a physical meeting, and 15% did not approve of either. See this PubCo post.
The Committee first advocated that companies ensure, in the event the company elects to use any type of virtual format, that the meeting permit the exercise of all applicable shareholder rights, that procedures be adopted that are fair to all shareholders, and that the company recognize shareholder concerns regarding the conduct of the meeting. In light of the importance of providing equal access to all shareholders, the Committee recommended that, in deciding whether to use any type of virtual format, companies consider the following:
- “Do we have adequate technology to reach all shareowners, as well as management, who wish to participate?
- Do we have a plan in place to give equal opportunities to both in-person and online participants (in the case of a hybrid meeting)?
- Are we enabling meaningful engagement with shareowners?
- Does our investing base broadly understand why we are holding the meeting virtually?
- Is this virtual meeting in the best interests of the majority of our shareowners?
- Do we have a plan in place to ensure that shareowners have opportunities to ask questions outside of the parameters of the virtual meeting?”
Notably, Committee members were split regarding the advisability of virtual-only—as opposed to hybrid—meetings.
Once a decision has been made to hold a virtual-only or hybrid meeting, the Committee advocated that the following principles apply:
- Companies should incorporate virtual technology as “a tool for broadening, not limiting” shareholder meeting participation—a reason that some Committee members endorse only hybrid meetings. The technology should facilitate participation by remote attendees to the same extent as in-person attendees.
- The meeting “should promote equitable and equal treatment of investor participants.” The company should offer “[o]pportunities for meaningful engagement between investors and directors….”
- Companies should communicate to their shareholders the benefits of virtual meetings “before moving to virtual meetings in order to ensure that shareowners understand what a virtual meeting is and how they can meaningfully participate.”
- Virtual meetings should be used to enhance open dialogue between shareholders and companies, providing “the same opportunities for questions and dialogue as an in-person meeting.”
There has been significant opposition to virtual-only annual meetings. The corporate governance policy of the Council of Institutional Investors provides that companies should use a virtual format for shareholders meetings “only as a supplement to traditional in-person shareowner meetings, not as a substitute. Companies incorporating virtual technology into their shareowner meeting should use it as a tool for broadening, not limiting, shareowner meeting participation. With this objective in mind, a virtual option, if used, should facilitate the opportunity for remote attendees to participate in the meeting to the same degree as in-person attendees.”
Similarly, proxy advisor Glass Lewis’ 2018 guidelines indicate that “[w]hen analyzing the governance profile of companies that choose to hold virtual-only meetings, we look for robust disclosure in a company’s proxy statement which assures shareowners that they will be afforded the same rights and opportunities to participate as they would at an in-person meeting. Beginning in 2019, however, Glass Lewis will generally recommend voting against members of the governance committee of a board where the board is planning to hold a virtual-only shareholder meeting and the company does not provide such disclosure.”
And, in 2017, the New York City Comptroller’s Office advised that, in response “to the surge in public companies holding ‘virtual‐only’ annual meetings, the NYC Funds amended their voting guidelines…to affirm their expectation that companies hold ‘in‐person’ annual meetings and only hold ‘virtual’ meetings to supplement, not replace, in‐person meetings. In‐person meetings enable shareowners, regardless of their size, to have a face‐to‐face opportunity to engage and ask questions of senior management and directors in the presence of other investors at least once per year. Under the new guideline, the NYC Funds will vote against incumbent members of the governance/nominating committee at any company that holds a ‘virtual‐only’ annual meeting. This new guideline was [applicable] to all U.S. portfolio companies in 2018.”
It is also worth noting that several shareholder proposals have been submitted, including some by the group associated with John Chevedden, to adopt a corporate governance policy to initiate or restore in-person annual meetings and to publicize this policy to investors. While the SEC staff has generally allowed omission of these proposals on the basis of the “ordinary business” exclusion, apparently some companies have, on receipt of the proposal, elected to revisit their policies and restore in-person meetings.
The Committee’s recommendations for best practices are designed to allow the same level of dialogue as is typically available at in-person annual meetings, recognizing that modifications may be appropriate as governance practices evolve.
- Because the meeting format is determined prior to publication of the proxy statement, the board should be mindful of prior shareholder reactions, as well as potential future reactions, before deciding among virtual-only, hybrid and in-person-only meeting formats. The proxy statement should clearly disclose the format of the meeting and participation instructions.
- The format decision should take into account the items to be voted on at the meeting as well as any other issues of concern to shareholders, including:
- “Whether the meeting may be limited to the consideration of routine or noncontroversial proposals, such as the uncontested election of directors and the ratification of auditors.
- Whether a controversial management or shareowner proposal may be considered at the meeting.
- Whether a significant business transaction, such as a merger, may be considered at the meeting.
- Whether a matter to be considered at the meeting may be subject to counter-solicitation or a ‘vote no’ campaign.
- Whether the company may be subject to significant shareowner dissent or activism concerns involving significant governance, operational or performance issues.”
- Companies should “annually evaluate their technology and process for the meeting to ensure maximum shareowner participation,” especially if a virtual-only meeting is contemplated. After a meeting that allows virtual participation, companies should analyze the extent of their success in achieving goals and consider changes to be made. The board should be involved in decisions about future virtual meeting formats.
- It is important to ensure that all participants have equal access, including allowing shareholder proponents to present their proposals on a “virtual basis,” implementing open video, internet and telephone lines that can be tested by shareholders prior to the meeting, and allowing virtual participation during the shareholder Q&A.
- Companies should adopt formal, universal rules of conduct that provide adequate opportunities for shareholders to ask questions or make comments about each proposal and that “promote both the reality and the perception of scrupulous fairness.” The rules of conduct should be available before and during the meeting to in-person and virtual attendees.
- The independent Inspector of Elections should “observe the virtual aspects of the meeting and review the final vote reconciliation prior to certifying the final results.”
- For the Q&A, in addition to allowing shareholders physically present to ask questions in person, shareholders should also be allowed to submit questions in advance of the meeting, whether through the company’s investor relations website, a shareholder discussion group or bulletin board, or over the internet during the live meeting. In addition, the “Committee recommends that the Chair take the first question received, after which the Chair should alternate among in-person attendees, those who submitted questions in advance and those shareowners online who may be submitting questions in real time.”
- The Committee also recommends, when there is a virtual component, that companies provide a toll-free number for call-in during the meeting. The shareholder calls “would be placed in a queue and taken in turn to ensure, to the fullest extent possible, that all shareowner questions will be taken on a first-come-first-served basis during the time that has been allotted for questions and general discussion. If there are still shareowners waiting to ask questions at the end of the allotted meeting time, the Chair of the meeting should consider extending the time, if possible.”
- Companies should establish reasonable time guidelines for questions, such as three- to five-minute limits for presentation of shareholder proposals and two-minute limits for general questions or comments.
- Companies should publish rules clearly explaining when any questions will be ruled out of order, such as “questions or comments that are not related to the proposal under discussion, are about personal concerns not shared by shareholders generally, or use blatantly offensive language.” In addition, all shareholders who wish to do so should have a turn to “speak,” whether in-person or online, on a particular matter before a second question or comment is permitted.
- The Committee recommends that companies “pay special attention to establishing rules of procedure that will promote transparency about how questions will be recognized. Where there is a virtual component to the meeting, companies should seek to avoid the appearance of, or potential for, manipulation with respect to the way they might screen, organize, combine, prioritize and answer, or fail to answer, their shareowners’ questions received in advance or via the web. Such rules for recognizing questions and comments by shareholders should be disclosed to meeting participants.”
- The company should “strongly consider posting all appropriate questions that have been received during the course of the meeting—and the company’s answers—on the investor page of [its] website as soon as is practical after the meeting.”
- Shareholders that participate virtually should “have the opportunity to see, hear and ask questions of board members and particularly independent board leadership.” Either an independent chair or independent lead director “should participate on at least an informal basis in chairing the meeting.”
- Companies should provide a technical support line for shareholders participating virtually.
- The Committee recommends that companies post a video of the meeting on their public websites and keep it archived “for a specific and reasonable period of time (ideally at least one year).”