I’ve written a lot about virtual shareholder meetings (VSMs) and how shareholder proposals (and their proponents) have been handled at those meetings. But there are also shareholder proposals about virtual shareholder meetings and some recent developments in that area. (Thanks to Steve Pantina at Proxy Analytics for drawing my attention to the latest proposals and finding the historical ones for me.)
Make Some Noise
You’ll recall that shareholders’ antennae went up after Broadridge rolled out its now market leading VSM platform in 2009. A few years later, several prominent public pension funds and advocacy groups started making noise about the cons (from the shareholder perspective) of VSMs when they sensed that a move to VSMs may become a growing trend (despite tiny numbers). But even well before then, some eagle-eyed shareholders first took notice when Delaware amended Section 211 of the Delaware General Corporation Law in 2000 to permit Delaware-incorporated companies to hold VSMs (subject to certain basic requirements).
In 2001, Boston Trust Investment Management, Inc. submitted this shareholder proposal at EMC Corporation (a Massachusetts-incorporated company):
Resolved: Shareholders request that EMC Corporation adopt a corporate governance policy affirming the continuation of in-person annual meetings, adjust its corporate practices policies accordingly, and make this policy available publicly to investors.
[Scroll to the bottom for the full text of the proposal and supplemental statement.]
EMC asked the SEC for “No Action” relief to exclude the proposal from its 2002 proxy statement, and the SEC staff granted the request, stating:
There appears to be some basis for your view that EMC may exclude the proposal under rule 14a-8(i)(7), as relating to EMC’s ordinary business operations (i.e., the determination of whether to continue to hold annual meetings in person).
It took quite a while before other (much smaller) shareholders found it necessary to send shots across the bow with similar proposals at Alaska Air, HP and Hewlett Packard Enterprise in 2016; Comcast in 2017; Frontier Communications in 2018; and American Outdoor Brands in 2019. In each instance, the company sought No Action relief in reliance on Rule 14a-8(i)(7) (Management functions), which permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” In their requests to the SEC staff for No Action relief, all these companies (starting with EMC) made the same three basic arguments that the proposals relate to:
1. the determination of whether the company will hold its annual meetings virtually or in person, which is an operational decision that is part of management’s bailiwick and too granular for a shareholder vote.
2. the location, conduct and mode of communication of the annual meeting. Where and how the meeting is held is also more of a logistical matter that should be decided by management. For shareholders to dictate these things would amount to micromanagement.
3. the company’s communications with its shareholders, which really involve “on the ground” activities that should be decided upon and done by management based on logistical and practical factors.
There are plenty of precedents for these arguments winning the day for companies with SEC No Action requests in analogous situations. And it’s pretty established under state laws and the Model Business Corporation Act that the chair of the meeting—typically the chair of the board—has broad authority to determine how shareholder meetings are conducted.
But this week, the SEC staff appears to have flipped the script. Earlier this year, The Humane Society of the United States submitted this proposal to Brinker International and Campbell Soup Company:
Resolved: Shareholders ask that [the company] develop and adopt a policy, and amend its governing documents as necessary, to ensure that moving forward, its annual and special shareholder meetings will be held either in whole or in part through virtual means (i.e., webinar or other on-line system) and that virtual attendance be allowed. This policy should be formally adopted within six months of the 2021 annual meeting and take effect immediately thereafter.
[Scroll down for the full text of the proposal and supplemental statement.]
The SEC staff’s responses to both No Action requests that made the same arguments under Rule 14a-8(i)(7) that have worked since 2001:
Unable to concur that Rule 14a-8(i)(7) provides a basis to exclude.
Wait a second...
What Changed?
The Humane Society’s proposal is definitely different from the predecessor VSM proposals. Past proponents have insisted that shareholder meetings not be virtual-only. They wanted to make sure there would always be a physical meeting location where they could go to look a board member in the eye and speak truth to power in person. They feared that there may come a day when the in-person meeting is extinct and all shareholder meetings are conducted by faceless boards using high tech platforms to control, suppress and disenfranchise shareholders—the “Wizard of Oz” scenario.
On the other hand, The Humane Society is insisting that shareholder meetings not be in-person-only. They want to make sure there will always be the option to attend remotely regardless of whether the meeting takes place at a physical location. (And “attend" remotely means having the ability to vote and participate during the meeting from afar, as opposed to merely being able to watch the meeting via live streaming.) The Humane Society’s concerns are over health and convenience, both of which can be significant barriers to in-person attendance and can create real dilemmas for shareholder proponents who under Rule 14a-8(h) “must attend the meeting to present the proposal.” So, give us a VSM or hybrid meeting, but whatever you do, don’t require in-person attendance.
These two proposals are essentially opposite sides of the same coin, but does that mean they should receive different No Action treatment? In my opinion, no. The same line of analysis should apply for The Humane Society’s proposal at Brinker International and Campbell Soup as it did for the proposals at EMC, American Outdoor Brands and everything in between. It shouldn’t matter that one is asking to preserve the in-person option and the other is asking for a guaranteed remote option. Both proposals relate to the determination of whether a company will hold its annual meeting virtually or in person. Both relate to the location, conduct and mode of communication of the meeting. And both relate to the company’s communications with its shareholders. So, what am I missing? Please explain.
No Explanation Necessary
Here’s the problem. There is no explanation because the SEC staff is not required to give one. They have the liberty to completely depart from decades of unbroken precedent and provide no rationale, at least not to anyone outside the building. And they don’t need to go to the Commissioners for a vote. On VSM-related proposals, the SEC staffers may have simply changed their minds (no doubt after considerable thought and discussion). This has been a point of frustration for both corporate lawyers and shareholder proponents forever.
What happens with these Rule 14a-8 No Action determinations is someone on the SEC staff will write an internal memo to memorialize their analysis and reasoning and stick it in a file somewhere inside 100 F Street. They may give a brief letter (or phone call) to the company and proponent with one sentence of substance for them to chew on, but that incredibly valuable internal memo will never be exposed to the sunshine that Justice Louis Brandeis so famously stated “is said to be the best of disinfectants.” (Clearly, that was before Purell and Clorox Wipes were invented!)
The SEC staff doesn't have to explain No Action decisions because technically they are not binding. The SEC staff reminds everyone that their responses on these requests “reflect only informal views” and “[o]nly a court… can decide whether a company is obligated to include shareholder proposals in its proxy materials.” Still, everyone relies these “informal views” as if they were law because no one wants to actually go to court and blow serious time and money, on top of what they've already spent on the No Action process, to litigate over a shareholder proposal, which after all is always "precatory" (the fancy term people in Corporate Governance Land use to say these proposals are merely requests or recommendations).
Since the SEC staff didn’t buy the arguments made by Brinker International and Campbell Soup, they’re basically inviting proponents to resurrect those EMC type proposals asking for annual meetings to always be in-person or hybrid. So, you can count on those reappearing this fall for votes at VSMs 2022. Of course, they will be challenged using the same three basic Rule 14a-8(i)(7) arguments, and that’s when we’ll see if the SEC staff has truly flipped the script on VSM-related shareholder proposals.
How Will Shareholders Vote?
It will also be interesting to see what kind of voting support The Humane Society’s proposal receives. (The dates of the Brinker International and Campbell Soup annual meetings had not been announced as of the date of this post.) I predict that it won’t garner any meaningful support from either company’s shareholder base. As I explained above, most shareholders who have strong opinions on VSMs believe this technology is more likely to be used for purposes of evil rather than good. So, they are not going to vote in favor of anything that may expand the use of VSMs. And proxy advisory firms will probably recommend voting against The Humane Society’s proposal because they’re not keen on VSMs either. The large institutional asset managers that can really move the voting needle pretty much don’t care since they don’t attend these meetings anyway, whether virtually or in-person, so they’ll follow management’s recommendation on how to vote (against) any VSM-related proposal.
[Update: Thanks to the folks at the International Brotherhood of Teamsters for pointing out to me that The Humane Society filed the same proposal at Cracker Barrel Old Country Store, Inc. this year. Cracker Barrel did not request No Action relief to exclude the proposal from its proxy statement, so it will go to a vote at the company's annual meeting on November 18 at the company's offices in Lebanon, Tennessee.]
[Update, Nov. 19, 2021: The Humane Society's proposal at Cracker Barrel received 58% support at its annual meeting.]
If the EMC type proposals to preserve the in-person option do get clearance to show up on proxy cards, they could receive significant levels of support, especially if bolstered by proxy advisory firm recommendations. But I still don’t see them getting close to majority support. If nobody attends these meetings in the first place, and the "right" to attend in person wouldn’t have the same potency as the rights for shareholders to call special meetings or act by written consent, how many people are going to fight for the right to go?
Text of VSM-Related Shareholder Proposals
Campbell Soup Company (Same one at Brinker International Inc.)
Proponent: The Humane Society of the United States
Annual Meeting: 2021
Proposal and Supporting Statement:
Resolved: Shareholders ask that Campbell Soup Co. develop and adopt a policy, and amend its governing documents as necessary, to ensure that moving forward, its annual and special shareholder meetings will be held either in whole or in part through virtual means (i.e., webinar or other on-line system) and that virtual attendance be allowed. This policy should be formally adopted within six months of the 2021 annual meeting and take effect immediately thereafter.
Supporting Statement:
Campbell Soup held its 2020 annual shareholder meeting via virtual webcast. Shareholders support this format and seek to ensure virtual meetings and attendance continue into the future. Please consider the following:
The COVID-19 pandemic has highlighted for many companies the need to ensure continuity of business operations through virtual or remote means. Countless employees have been expected (or even required) to work remotely. Business travel has been dramatically curtailed as the U.S. Centers for Disease Control and Prevention (CDC) has issued health and safety warnings related to air travel. And meetings of all types have been held virtually in greater numbers than ever before.
Yet under its current by-laws, the company may choose to only hold its annual and special shareholder meetings in-person, requiring attendance to be physical, even in circumstances where the CDC recommends against, or when unexpected conditions prevent, travel.
To put it simply, this is unfair and unnecessary: it increases the health risks for any shareholder who may wish to present a proposal, ask a question, or even just attend such a meeting; for company executives and other employees who may be required to attend; for board members; and for support staff at meeting venues.
It also likely deters attendance by forcing shareholders to choose between protecting their health or risking illness in order to exercise their basic shareholder rights.
The advantages of virtual meetings are significant: they add convenience and reduce time and expenses for shareholders, management, and board members; and they promote wider engagement between the company and shareholders.
Further, virtual meetings contribute to various company social and sustainability policies. They further an inclusive company culture by enabling all shareholders an equal opportunity to participate in annual meetings, regardless of financial, physical, or other barriers. And removing the necessity of all shareholders to travel would provide an environmental benefit to the company’s ESG practices.
The COVID-19 pandemic has fundamentally changed the way companies think about and hold meetings. In addition to the business advantages virtual meetings provide, it is fundamental that shareholders should be allowed to attend meetings and exercise their rights without putting themselves and others at increased risk. And corporate executives and employees, as well as board members, should be allowed to do the same. For this reason, you are encouraged to vote FOR this proposal.
SEC Staff Response: “Unable to concur that Rule 14a-8(i)(7) provides a basis to exclude.”
Proponent: Matthew Page
Annual Meeting: 2018
Proposal and Supporting Statement:
Shareholder Proposal: Require Frontier Communications Board to conduct a face-to-face Annual Meeting with common shareowners starting in 2020, changing all relevant Frontier Communications Corporation governance documents to require such a face-to-face meeting to replace the current “remote” or “virtual” meeting.
My name is Dr. Matthew A. “Matt” Page and I am the holder of 14,000 shares of Frontier Communications common shares (FTR). A letter confirming my ownership of Frontier Communications shares for the minimum time required to submit a shareholder proposal is attached to this document. In order to qualify to submit this proposal, I commit to and certify that I will hold at least the required number of shares through the next Annual Meeting and that I am prepared to present, explain and defend this proposal at the next Annual meeting.
In April 2016, Frontier Communications consummated the so-called “CTF” acquisition, simultaneously taking on significant debt to pay for the acquisition resulting in a highly leveraged balance sheet, with an adjusted share price of FTR on March 31, 2016, just prior to the close of the acquisition being $83.85. The tenth earnings report was made on November 5th after the close, with the market rendering their verdict on the report by driving shares down from the prior day close of $5.26 to yesterday’s close of $4.06, a decline of 22+% in just one day. Therefore, since the time of the CTF acquisition, with this existing board in place, common share value has declined by 95+%, a destruction of shareholder value of epic proportions in such a very short time. During this period, the board has pursued a growth strategy that, unfortunately, has delivered not a scintilla of growth; indeed, revenue has imploded from $2,608M for Q2’16 to $2,126M for Q3’18, a decline of 18.5% in spite of significant capital targeting “growth”. In the face of this, there has been no apparent reconsideration of the failing corporate strategy on the part of the board. Apparently oblivious to the market input, the board continues to motor on, apparently unfazed by continued, consistent failure.
Throughout this time, the board has eschewed meeting face-to-face with the owners of the company, electing to conduct what is euphemistically referred to as a “virtual” or “on-line” meeting. This ensures a minimal interaction with owners and best avoids being held accountable for the disastrous results delivered during this period.
It is time that this board meets with owners face-to-face to openly discussion how the current challenges can be met, this time offering an approach with more credibility and with a reasonable chance to stem the decline. The results during this period of “virtual” meetings” speak for themselves, but even with this overwhelming evidence, I doubt this board will take the step voluntarily.
Therefore, I propose a change to Frontier’s Corporate governance documents to require a face-to-face annual meeting.
SEC Staff Response: “There appears to be some basis for your view that the Company may exclude the Proposal under rule 14a-8(i)(7), as relating to the Company’s ordinary business operations. In this regard, we note that the Proposal relates to the determination of whether to hold annual meetings in person.”
Comcast Corporation (Same one at American Outdoor Brands Corporation)
Proponent: The Sisters of St. Francis of Philadelphia
Annual Meeting: 2017
Proposal and Supporting Statement:
WHEREAS: Comcast discontinued its in person stockholders meeting and is presently holding a virtual annual meeting by internet only.
We strongly support the use of new technologies to make annual meetings accessible to stakeholders who cannot attend in person. This makes “attendance” simpler for investors globally and is a creative tool expanding outreach.
But we do not believe that Internet-only meetings should be substituted for traditional in-person annual meetings. Instead they should be complementary.
We believe the tradition of in-person stockholder meetings plays an important role in holding management accountable to its investors.
In contrast, online-only stockholder meetings allow companies to control which questions and concerns are heard and manipulate the exchanges between shareowners and the company. Face-to-face annual meetings allow for an unfiltered dialogue between shareholders and management.
The Council of Institutional Investors, a coalition of America’s largest pension funds with portfolios exceeding $3 trillion, in its corporate governance guidelines states, “Cyber meetings should only be a supplement to traditional in-person shareholder meetings, not a substitute.”
In addition, this governance issue has elevated strong opposition from many investors. For example, the pension funds of New York City are voting against directors serving on Board Governance Committees of companies moving to virtual only meetings. This illustrates the increasingly controversial nature of eliminating in person stockholder meetings and signifies that this is not a minor governance matter for management to decide.
Additionally, we believe in-person annual meetings are necessary for several reasons:
Annual meetings are one of the few opportunities for top management and the Board to interact directly, face-to-face, with a cross-section of their shareholders.
Annual meetings provide for questions to be posed directly to the Chair of the Audit, Compensation or Governance Committees of the Board.
While some corporations argue eliminating face-to-face annual meeting can reduce costs and improve efficiency, we believe the investment in creating a physical space for shareholder meeting is modest and money well spent.
We believe this controversial governance step sets a precedent creating a “slippery slope” encouraging other companies to insulate themselves from shareholders.
“Virtual” on-line meetings can be used to insulate a company from shareholder interaction or to portray any opposition as insignificant. Imagine a company wanting to downplay investor frustration over compensation policies or practices, or poor business decisions leading to substandard financial performance or questionable governance or environmental records avoiding shareholders by discontinuing a stockholder meeting.
In addition, if there was a major crisis with a company, a merger being proposed or a significant shareholder proposal, investors would want an in person stockholder meeting.
RESOLVED: Shareholders request the Comcast Board adopt a corporate governance policy affirming the continuation of in-person annual meetings in addition to internet access to the meeting, adjust its corporate practices accordingly, and publicize this policy to investors.
CONCLUDING STATEMENT: We ask our fellow shareowners to vote for this resolution supporting good governance and the longstanding tradition of in person annual stockholder meetings.
SEC Staff Response: “There appears to be some basis for your view that the Company may exclude the Proposal under rule 14a-8(i)(7), as relating to the Company’s ordinary business operations. In this regard, we note that the Proposal relates to the determination of whether to hold annual meetings in person.”
Alaska Air Group, Inc. (Same one at HP Inc. and Hewlett Packard Enterprise Company)
Proponent: Harrington Investments Inc. (via John Chevedden)
Annual Meeting: 2016
Proposal and Supporting Statement:
RESOLVED: Shareholders request that our Board adopt a corporate governance policy to initiate or restore in-person annual meetings and publicize this policy to investors.
Our management has adopted procedures allowing it to discontinue a Corporate America tradition - a physical stockholders meeting and “substitute” a virtual meeting - a fundamental change in the way management and shareholders relate.
Internet-only meetings should not be substituted for traditional in-person annual meetings. The tradition of in-person annual meetings plays an important role in holding management accountable to stockholders.
In contrast, online-only annual meetings could allow company management to control the questions and concerns that are heard and manipulate the exchanges between shareowners and management. Face-to-face annual meetings allow for an unfiltered dialogue between shareholders and management. The Council of Institutional Investors, a coalition of America’s largest pension funds with portfolios exceeding $3 trillion, adopted a corporate governance guidelines stating, “Cyber meetings should only be a supplement to traditional in-person shareholder meetings, not a substitute.”
Additionally, in-person annual meetings are needed for these reasons:
Annual meetings are one of the few opportunities for top management and the Board to interact directly, face-to-face, with a cross-section of their shareholders.
Annual meetings provide for direct questions to be posed to the Chair of the Audit, Compensation or Governance Committees of the Board.
While some underperforming managers can argue that eliminating face-to-face annual meetings can reduce costs, the investment in creating a physical space for shareholder meetings is money well spent.
Dumping in-person meetings creates a “slippery slope” to encourage the management of other companies to insulate themselves from shareholders. Imagine a CEO who wanted to downplay investor frustration over outrageous executive pay, dismal business decisions or questionable environmental practices.
“Virtual” on-line meetings would be a harmful way to insulate management from shareholder interaction or to portray any opposition as trivial. Imagine if Wells Fargo had a virtual meeting after dumping CEO John Stumpf and investors wanted to attend an in-person meeting to discuss the recent fraud and steps to insure it didn’t happen again.
In addition, if there was a major crisis with a company, a merger being proposed or a significant shareholder proposal, investors would want an in person stockholder meeting.
Please vote to maintain shareholder value.
SEC Staff Response: “There appears to be some basis for your view that Alaska Air may exclude the proposal under rule 14a-8(i)(7), as relating to Alaska Air’s ordinary business operations. In this regard, we note that the proposal relates to the determination of whether to hold annual meetings in person.”
Proponent: Boston Trust Investment Management, Inc.
Annual Meeting: 2002
Proposal and Supporting Statement:
Whereas: EMC was a strong and public backer of legislation (S 1797) in the Commonwealth of Massachusetts that would have allowed Massachusetts corporations to eliminate face-to-face annual meetings in favor of “virtual meetings” broadcast over the Internet. The provision allowing the elimination of face-to-face annual meetings was removed from the legislation following a strong public backlash that included investment organizations and citizens groups. In defense of its lobbying activities, EMC spokesman Mark Frederickson, stated that “An annual meeting as a forum for public causes - that’s not the purpose.” We are disappointed with this characterization. Stockholders have a right to raise questions about financial and social issues that affect EMC’s bottom-line and image.
We support the use of new technologies to make annual meetings accessible to stakeholders who cannot attend in person, but do not believe that Internet-only meetings should be in lieu of traditional in-person annual meetings. We believe the tradition of in-person annual meetings plays an important role in holding management accountable to stockholders.
In contrast, online-only annual meetings would allow companies to control which questions and concerns are heard. Last year, EMC limited questions from the floor, an unusual practice in corporate America. Face-to-face annual meetings should allow for an unfiltered dialogue between shareholders and management, in the spirit of America’s finest democratic tradition.
The Council of Institutional Investors, a coalition of 120 of America’s largest pension funds with portfolios valued over $1 trillion, has among its published corporate governance guidelines for effective governance of public companies, “Cyber meetings should only be a supplement to traditional in-person shareholder meetings, not a substitute.”
Additionally, we believe in-person annual meetings are necessary for several reasons:
The digital divide persists in the United States and not all shareholders have access to computers for online meetings.
Internet-only meetings limit media access to assembled shareholders. Open media reporting not only serves to protect the financial interest of shareholders, but also the democratic interests of citizens and the state.
While some corporations have argued that eliminating the face-to-face annual meeting is a way to reduce costs and improve efficiency, we believe maintaining our democracy at a modest money and the investment in creating an annual space for shareholder dialogue is money well spent.
Annual meetings are one of the few opportunities for top management and the Board to interact directly with a broad cross-section of their shareholders.
Resolved: Shareholders request that EMC Corporation adopt a corporate governance policy affirming the continuation of in-person annual meetings, adjust its corporate practices policies accordingly, and make this policy available publicly to investors.
Concluding Statement: We are concerned that our management was such a strong supporter of legislation that would have allowed for the discontinuation of in-person annual stockholder meetings.
We believe EMC’s support for such legislation is a serious step backwards for shareholder rights.
Therefore, we ask our fellow shareholders to vote for this resolution supporting shareholder democracy.
SEC Staff Response: “There appears to be some basis for your view that EMC may exclude the proposal under Rule 14a-8(i)(7), as relating to EMC’s ordinary business operations (i.e., the determination of whether to continue to hold annual meetings in person).”