Over the last few years, regulators and investors have
demanded greater transparency from U.S. corporations. Now, companies are turning the tables: They want to know the names of their shareholders, and they want the ability to communicate with them directly.
With governance advocates pushing for shareholder democracy through measures like a majority vote standard, the prospect of contentious director elections becomes increasingly likely, and companies complain that the current system for communicating with shareholders puts them at a disadvantage. In 2004, the Business Roundtable asked the Securities and Exchange Commission (SEC) to consider changing the rules that govern how companies communicate with shareholders when shares are held in street name. The National Investor Relations Institute (NIRI), the Securities Transfer Association and the Society of Corporate Secretaries and Governance Professionals have since joined the corporate clamor requesting SEC action. "We're talking about first trying to establish some type of mechanism whereby, going into the proxy season and going into annual meetings, corporations are able to have direct communications with all of their shareholders, without having to go through broker-dealers," says Thomas Lehner, public policy director for the Business Roundtable, a group that represents the CEOs of big U.S. companies. Under the current system, when questions arise about a proposal on a proxy, "companies don't have the ability to put out in a quick way information that shareholders might want," Lehner says.
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Currently, when dealing with the 70% to 80% of shares that are held in street name, companies must go through the bank or broker-dealer to communicate with the owners of the shares. The banks and brokers hire ADP Investor Communications Services (ADP ICS), a unit of Automatic Data Processing Inc., to do the work: It polls brokers and banks to compile a list of each company's shareholders and then sends shareholders information from the company, like annual reports and proxy statements.
Chuck Callen, vice president of regulatory affairs for ADP ICS, says it has put in place technology that saves companies a great deal of money. "This is a process that works well," Callen says. "By and large, issuers as a community are highly satisfied."
"ADP has created a lot of efficiencies, and they probably do save people a lot of money," says Geoff Loftus, a vice president at the Society of Corporate Secretaries. "But that's based on the current model–a paper-driven process and the names are not transparent to the companies." Lehner of the Business Roundtable notes that there is no competition now, and when competition is introduced into a market, prices usually decline. "We just think the whole process is very antiquated in this day and age, and we think there's a better way to do this," he says. "It would help companies communicate, and it would save shareholders a ton of money. Ultimately, the companies and the shareholders pay all the costs that are built into the system now."
At the same time, the New York Stock Exchange (NYSE) is contemplating a revision of a related regulation, known as the 10-day rule, that allows brokers to vote the shares they hold in street name if the owners haven't returned their voting instructions within 10 days of the annual meeting. Governance groups have called for the elimination of broker votes entirely, arguing that it's basically a way of stuffing the ballot box for management's position. Callen warns that doing away with the 10-day rule could threaten the ability of companies to get a quorum for their annual meetings. ADP's statistics from the 2004 proxy season show that of the more than 1,400 NYSE-listed companies, 328 would not have achieved a quorum in an orderly fashion without the 10-day rule, he says.
Any overhaul of the system for shareholder communications is likely to be a while in coming. The Business Roundtable and the other groups seeking a change don't yet have a detailed plan for how to replace the current system. And they face formidable opposition from the banks and brokerages, which regard the names of their customers, the shareholders, as proprietary information. But Louis Thompson, NIRI's president, believes that in the end the companies will prevail. "As the whole issue of shareholder democracy moves forward, it just makes sense for companies to be able to communicate [directly] with these folks," he says.
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