E-Proxy Reform, Activism, and the Decline in Retail Shareholder Voting

Shareholder voting is a hot button issue for regulators and policy makers in the United States as well as in Europe. However, amending the proxy system can be challenging, given the many unintended consequences of single changes on the system as a whole. The recent e-proxy reform by the U.S. Securities and Exchange Commission (SEC) is a case in point. Adopted by the SEC in 2007 and effective for all companies starting from the 2009 proxy season, the e-proxy rules require issuers to post all proxy materials on a public website and to choose between the “full set delivery” option and the “notice only” option to deliver such materials to shareholders. While the former is substantially similar to the traditional means of providing proxy materials in paper, the latter allows issuers, in lieu of mailing hard copies of the proxy materials to shareholders, to send them a notice informing that the proxy materials are available on a web site. The new delivery system has brought significant savings on printing and mailing costs but, at the same time, has shown some flaws.

In my recent paper, E-Proxy Reform, Activism, and the Decline in Retail Shareholder Voting, published as part of the Conference Board’s Director Notes series, I explore issues that have arisen since the introduction of the new electronic forms of delivering voting materials. First, contrary to what was expected, the e-proxy rules did not encourage activists’ proxy solicitations, thus confirming that that printing and mailing expenses are only a marginal fraction of the overall costs of running a freestanding proxy solicitation. Second, the savings for companies opting for the “notice only” method came at the price of a significant drop in retail shareholders participation. The analysis of the initial phase of the implementation of this reform sheds light on how the shareholder communication system can affect voter turnout and provide guidance for a preliminary assessment of the the European regime of shareholders’ access to meeting-related information, as recently amended by the European Shareholders’ Rights Directive.

The full paper is available for download here.