In Depth: Growth in Virtual-Only Meetings a Concern for Institutional Investors

With more states moving towards allowing virtual-only shareholder meetings, shareholder activists and investors say this trend is not conducive to good corporate governance, considering that it allows companies to better control a meeting’s proceedings, as well as shareholder participation.

According to law firm McGuireWoods, nearly “half of all US jurisdictions” now allow the possibility of virtual-only shareholder meetings, with Virginia joining this group as of July 2017. The trend began in 2000 in Delaware, and shareholder activists say it has gained traction as a result of efforts by technology vendors that enable such virtual meetings.

Glenn Davis, director of research for the Washington, D.C.-based Council of Institutional Investors (CII), says of virtual meetings, “There is a great opportunity here to have a worldwide audience, and to get shareholders involved. The problem is that the vendors and some companies are pretending that there is a false choice, that in order to use this technology, you must eliminate the in-person opportunity, and that’s just not the case.”

Broadridge, a vendor that has been promoting virtual meetings, reports that about 200 companies, including 20 Fortune 500 companies, opted for virtual shareholder meetings in 2016. Of these, about 160 meetings were virtual-only, doing away with the physical shareholder meeting.

Although Broadridge touts the cost savings for companies, activists are skeptical. Gary Lutin, chairman of the New York-based Shareholder Forum, points out, “With a smaller company, at least, it really is not cheaper to set up cameras and microphones in the electronic-only process. That costs a lot more money than putting some folding chairs in a conference room with a pot of coffee.”

Rather, the skeptics believe that the goal is more geared towards controlling shareholder participation at these meetings; for instance, the companies control which shareholders get to ask questions, they can cut off input they don’t like, and shareholders cannot generally share their lack of satisfaction with management. Of course, this could happen at a physical meeting too, if that is the management’s agenda. But there are no standards yet relating to how a virtual meeting should be conducted, and companies have more discretion, particularly since shareholders cannot interact with each other, or be aware that someone wants to raise a question.

According to Natasha Lamb, a portfolio manager with Boston-based Arjuna Capital, “What you have is a further deepening of the echo chamber between management and the board, and an increased ability for management and the board to silence shareholders, because there is greater control over who speaks.” Ultimately, companies could end up “shooting themselves in the foot” by not tapping into a diverse set of views that could make them aware of unmanaged risks or potential opportunities, she notes. 

At least one major institutional investor has taken a stand on virtual-only meetings. According to a CalPERS statement to CIO, “Companies should hold shareowner meetings by remote communication (so-called “virtual” meetings) only as a supplement to traditional in-person shareowner meetings, not as a substitute. Companies incorporating virtual technology into their shareowner meeting should use it as a tool for broadening, not limiting, shareowner meeting participation. With this objective in mind, a virtual option, if used, should facilitate the opportunity for remote attendees to participate in the meeting to the same degree as in-person attendees.”

And the Office of New York City Comptroller Scott Stringer, who oversees New York City Pension Funds, indicated earlier this year that it is looking to vote against governance committee members of S&P 500 companies that hold virtual-only meetings in 2017, extending this policy across all companies in 2018.

As to how this trend might shape up in future, CII has forwarded ideas to a special committee set up by Broadridge to identify best practices for virtual meetings, according to CII’s Davis. He says, “It is important that companies discuss the format of the shareholder meeting at the board level, and that they understand that it is a meaningful concern among institutional investors, particularly that more may be given up as a result of closing your physical doors to the meeting than they are being led to believe by the vendor community.”