Considerations for boards.
In the current age of digital transformation, moving from a physical to an electronic meeting of shareholders seems natural. However, virtual-only annual meetings — shareholder meetings held solely online — remain controversial.
For example, when only a minority of directors attended the 2018 virtual-only meetings of two large-cap companies, one of which included six shareholder proposals, critics argued that virtual technology was being used to limit shareholder engagement with the board.
Accordingly, boards considering virtual-only meetings should take into account a company’s specific circumstances, the views of shareholders and the current debate, including issues of fairness and transparency.
Key arguments from opponents are that such meetings eliminate face-to-face interaction with the board and management and could be structured to limit shareholder participation — for example, allowing a corporation to cherry-pick questions posed or limiting questions to those submitted in advance of the meeting.
Institutional Shareholder Services (ISS), which surveyed investor sentiment on virtual-only meetings when updating its voting policies for 2018, has not yet adopted a formal U.S. policy. In Europe, however, ISS supports hybrid meetings (a combination of a virtual and physical meeting) and oppose virtual-only
Beginning in 2019, Glass Lewis will recommend voting against governance committees at companies planning to hold virtual-only meetings unless the company provides robust disclosure assuring the same participation rights and opportunities as in-person meetings.
The Council of Institutional Investors maintains that virtual meetings should only be used to “supplement” traditional in-person meetings, and is considering a policy amendment under which any shareholder who wants to be in the physical room from which a chair conducts a virtual-only meeting the choice to do so.
Taking a more aggressive stance, The New York City Comptroller announced that the NYC Pension Funds would vote against directors on governance committees at companies holding virtual-only meetings during 2018.
From the company perspective, virtual-only meetings may be attractive for uncontested meetings, since few shareholders typically attend, and such meetings are often brief and pro forma. Virtual-only meetings are also less costly than in-person meetings (since companies need not rent space or incur security and similar expenses), and allow more retail and institutional investors to participate without incurring travel expenses.
However, virtual-only meetings may not be well-suited for certain situations. Since shareholders participating remotely can vote during the meeting until the polls close, outcomes could be more unpredictable (which is relevant for contested issues), approval of a major transaction, or contentious shareholder proposals are on the ballot.
Currently, 30 states, including Delaware, allow virtual-only meetings; 42 (including the District of Columbia) allow hybrid meetings; and nine states require an “in-person only” format, according to 2018’s “Principles and Best Practices for Virtual Annual Shareowner Meetings.”
While hybrid meetings may satisfy opponents, they do not offer the cost-saving of a virtual-only meeting, effectively requiring double-track logistics.
Moreover, some companies that experimented with hybrid meetings subsequently moved to virtual-only meetings. According to marketing and communications consultant Broadridge, of 24 companies that held hybrid meetings in 2016, half switched to virtual-only meetings in 2017. At the same time, some companies that held virtual-only meetings in 2017 backed away from a virtual-only format after strong investor objections.
The number of companies employing virtual meetings remains small, but has been increasing. According to Broadridge’s 2018 “Virtual shareholder meetings,” 236 companies held virtual-only or hybrid meetings in 2017 on Broadridge’s platform (compared to 187 in 2016), 90% of which were virtual-only. Broadridge estimates that at least 300 companies will host virtual-only or hybrid meetings in 2018.
The Best Practices Committee for Shareowner Participation in Virtual Annual Meetings, a working group of investors, public companies, and proxy and legal service providers, published “Principles and Best Practices for Virtual Annual Shareowner Meetings” to address some of the issues raised by virtual meetings. While the members of the committee have differing views on virtual meetings, they emphasize in the report that remote participants should have the same amount of access as if attending in person, and caution that virtual technology should be “a tool for broadening, not limiting shareholder participation.”
Given the controversy, companies considering virtual-only meetings should gauge the sentiment and voting policies of their shareholders, understand the potential for negative votes and negative publicity, analyze whether a hybrid meeting is an attractive middle ground, and continue to monitor developments.
Claudia H. Allen is Senior Adviser to KPMG LLP’s Board Leadership Center.