ISS Corporate Governance Blog: Online Communication Grows

From Friday's ISS Corporate Governance Blog:

Online Communications GrowsSubmitted by: L. Reed Walton, Staff Writer

Even before the Securities and Exchange Commission's new "e-proxy" rules take effect on July 1, shareholders and companies are increasingly using the Internet to communicate on governance matters.

Online sources like weblogs, video sites, and e-mail campaigns--not to mention company-sponsored Web sites--have emerged in recent years, sparking hope among investors for improved communication. In addition, these new forms of communication have gotten more attention since the SEC announced recently that it was studying the feasibility of "electronic shareholder forums."

Among the notable Internet efforts this season was the California Public Employees' Retirement System's (CalPERS) campaign for proxy access at UnitedHealth Group. The pension fund set up a Web site, www.healunitedhealthgroup.com, to accompany a letter sent to shareowners before the company's May 29 annual meeting.

CalPERS urged investors to vote for a proposal that calls on the company to amend its bylaws to permit investors who own at least a 3 percent stake for over two years to nominate up to two directors to appear on the management proxy statement. That proposal received 45.3 percent support, according to a company regulatory filing.

In addition, Yahoo! shareholder Eric Jackson is using a weblog (also known as a "blog") and streaming video to generate retail investor support for a "vote no" campaign against seven directors in advance of the company's June 12 meeting.

Earlier this season, ExxonMobil provided an online forum for shareholders to ask questions on proxy materials before the company's May 30 meeting. The company set a cut-off date of May 15 for all questions.

One of the primary goals of the new SEC rules is to reduce the cost to companies that mail thousands of hard-copy proxy statements--a package which, as SEC Chairman Christopher Cox has noted with chagrin, has gotten bigger with the advent of new compensation disclosure standards.

The new proxy rules stipulate that a company may--but is not required to--send proxy materials to investors via a "notice and access" model, meaning that the default method of proxy delivery will be an e-mailed notice of the annual meeting with Internet-based links to proxy materials.

The company can then send a paper proxy card 10 days or more after the release of the original notice, and shareholders are free to "opt out" of electronic delivery in favor of hard-copy materials.

In its announcement of the new rules in December, the SEC explicitly barred companies from transitioning to the predominantly electronic format until after the July 1 effective date.

Electronic Forums

The commission also has hired consulting firm Broadridge Financial Solutions to report on the feasibility of setting up secure "electronic shareholder forums" that would allow investors to discuss, debate, and potentially vote on issues.

The idea was discussed at SEC roundtables on the proxy process on May 7 and May 25. Both corporate and investor advocates raised some doubts, with some arguing that shareholders wouldn't take the idea seriously or trust such a forum if it is run by management and unregulated by the commission.

In a May 25 letter to the SEC, CalPERS General Counsel Peter Mixon praised the voluntary efforts by ExxonMobil and other firms to facilitate communications with shareholders. However, he urged the SEC not to replace non-binding shareholder proposals with "an unproven chat room concept that is riddled with concerns."

"It is doubtful that a chat room even with informal voting could adequately replace" non-binding proposals, which are taken seriously by companies and shareholders, Mixon wrote.
William J. Mostyn III, deputy general counsel at Bank of America, expressed concern about the staff resources that his company would have to devote to monitor an electronic forum if it was a supplement to non-binding proposals.

"I look at this as a parallel operation that would tie up my resources all year long," Mostyn told the commissioners at the May 25 roundtable. Evelyn Davis, a long-time shareholder activist, also spoke out against electronic forums. "You should not force the Internet on senior citizens and small shareholders," she said.

At the May 7 roundtable, Paul Neuhauser, a University of Iowa law professor, expressed skepticism that "serious" investors would use such a mechanism.

"To the extent it looks like an Internet chat room, it would be entirely useless," he said, citing examples of irrelevant postings that appeared on the Yahoo Finance chat room for General Electric.

Dissident Challenges

The new e-proxy rules are expected to reduce solicitation costs for dissidents as well. Dissatisfied shareholders have been using the Internet to win support for alternate proxy campaigns for at least seven years. In 2000, lawyer Les Greenberg used an online campaign to nominate himself and four other dissidents to the 12-member board at Luby's Cafeterias.

Greenberg attracted supporters through postings on a Yahoo online message board, including some former members of Luby's management, according to The Wall Street Journal. Greenberg said his nominees won 24 percent of the vote and received significant support for two of their proposals.

In 2005, Alaska Air dissidents tried to conduct an all-online proxy contest. They posted their alternate proxy card on the Internet and urged shareholders to scratch out the names of the incumbent directors and replace them with the dissidents'--a sort of "write-in" campaign. The bid was defeated when the New York Stock Exchange ruled that the dissidents had not physically mailed proxy cards to enough shareholders to make it a legitimately contested election. The new e-proxy rules will officially open the online avenue to dissidents.

This season, investor Eric Jackson is using several online methods to enlist support for his "vote no" campaign at Yahoo. Jackson, CEO of consulting firm Jackson Leadership, maintains a blog about Yahoo called Breakout Performance and has posted several video appeals to shareholders on streaming video site YouTube (now owned by Yahoo rival Google).

Jackson told Governance Weekly that he received several responses--many from current and former Yahoo employees--when he posted a blog entry in January speculating that Yahoo's financial recovery had more to do with market conditions than with CEO Terry Semel's leadership.

"It became clear to me that it was kind of an emotional topic," Jackson said.

Jackson, who says he has the support of investors who own about 0.2 percent of Yahoo's voting shares, said he expects significant withhold votes against seven of the company's 10 directors.

*This article appeared in the June 7 edition of Governance Weekly. Director of Publications Ted Allen contributed to this article.

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