Given the time and cost involved for institutional investors to cast proxy votes at thousands of companies each year, should states allow issuers to hold shareholder meetings less frequently?
That provocative question was asked by Widener University Law Professor Lawrence Hamermesh during a speech, "Too Busy to Think, Spread Too Thin to Matter: Making a Rational Stockholder Voting System an Agenda Item for Management/Investor Dialogue" at the Practicing Law Institute's Ninth Annual Directors' Institute on Corporate Governance on Sept. 7 in New York.
In his speech, Hamermesh pointed to the heavy proxy season workloads that many institutions face each proxy season. He cited a comment letter from the Colorado Public Employees' Retirement Association that said that it voted on 8,154 proposals at 2,738 shareholder meetings in 2009, as well as a comment letter from Connecticut's state treasurer, who was responsible for voting on more than 16,000 ballot items at over 2,000 stockholder meetings in one year.
Currently, Delaware and most other U.S. states require companies to hold shareholder meetings on an annual basis. According to Hamermesh, two states, Minnesota and North Dakota allow companies to hold less frequent shareholder meetings, but set lower thresholds for investors to call special meetings.
At the same time, Hamermesh said he believes that directors should be accountable to shareholder votes and he acknowledged that--given the acceptance of poison pills by the Delaware courts--that the right to elect and remove directors "is the tool of last and maybe even first resort for any serious takeover bidder."
"But those who manage other people's money through institutional investment vehicles should ask themselves . . . whether it is importantly useful to their own beneficiaries to vote every year in every company on uncontested elections of directors," he said. "Is it importantly beneficial for portfolio companies and their stockholders to incur the costs of convening meetings and soliciting proxies every year?"
"[W]hy shouldn't all stockholder meetings be special?" he asked. "Is there a way for laws and regulations and listing standards to promote and facilitate stockholder voting when it matters, and when stockholders actually care about it for good, economic reasons, yet dispense with it when it's an empty but costly exercise?"
While some issuers might prefer to hold less than annual shareholder meetings, it's not at all clear that many investors would support less frequent gatherings. If shareholder meetings were held every two or three years, institutional investors would have to keep track of which issuers are holding their meetings in a given year and adjust their staffing levels accordingly.
This year's proxy vote results suggest that many institutions believe that annual accountability is worth the additional cost and work. During the spring proxy season, most investors supported annual "say on pay" votes by a wide margin, even at companies where management recommended a triennial frequency. Likewise, shareholder proposals seeking annual elections for all directors averaged more than 70 percent support this year.
In a blog posting today, shareholder activist Jim McRitchie agrees with Hamermesh’s point that shareholders are too busy, but McRitchie asserts that less frequent meetings would be the wrong solution.
“Yes, annual meetings and votes are mostly meaningless, as Hamermesh observes. Why? Shareowners don’t have any real power over precatory issues on the ballot, since boards get the final say,” McRitchie wrote. “Additionally, they don’t have any say over who is nominated (in the vast majority of cases). It is like voting in an old communist bloc country where only one party’s candidates appear on the ballot. The answer isn’t to hold elections every three-to-five years; the answer is to make elections actually mean something. Then, even retail shareowners would be much more likely to vote.”
McRitchie argues that proxy access provisions with low barriers to nominate candidates would be one solution. “Elections would certainly be more meaningful if every year shareowners would expect to see competing candidates, so we would likely see less voter apathy. In most cases, incumbents would be elected but there might easily be an injection of fresh ideas from challengers,” he wrote.