Back to the Future? Reclaiming Shareholder Democracy Through Virtual Annual Meetings

Yaron Nili is assistant professor at the University of Wisconsin Law School and Megan W. Shaner is professor at the University of Oklahoma College of Law. This post is based on their recent paper.

The COVID-19 global pandemic and subsequent state responses had immediate and direct impacts on annual shareholders meetings across companies large and small. In the midst of the 2020 annual meeting season, COVID-19 was declared a pandemic and a national state of emergency was declared in the United States resulting in forty-three states issuing mandatory stay-at-home orders and most major companies implementing corporate travel restrictions, forcing corporate boards to rethink their in-person annual meetings. Most companies quickly turned, for the first time, to virtual meetings as an alternative for satisfying their statutorily-required obligation to convene a meeting of their shareholders.

Despite their relatively long existence, virtual meetings garnered only modest use prior to 2020, so the en-masse transition to virtual meetings provided a natural experiment for evaluating the benefits and concerns of remote participation. More importantly, however, it thrust the annual meeting back into the corporate governance spotlight, providing an opportunity to re-think the purpose and prevailing practice of annual meetings. In our paper, Back to the Future? Reclaiming Shareholder Democracy through Virtual Annual Meetings, we offer a detailed empirical account of the impact of COVID-19 on annual meetings and shareholder voting. The paper situates virtual annual meetings within a robust historical overview of annual meetings and shareholder voting to argue that virtual meetings provide an opportunity to regain one of the core objectives and functions of annual meetings—shareholder democracy. We underscore the promise of virtual annual meetings in improving shareholder democracy, engagement, and feedback, which have largely been missing from annual meetings. Ultimately, we view the forced move to virtual meetings in 2020 as an opportunity to re-imagine annual meetings—both using the pitfalls of the 2020 season as an opportunity for growth and the benefits provided to shareholders and issuers alike as a space to learn.

Observations regarding the 2020 annual meeting season

Using a hand-gathered dataset, we track all 50 states’ responses to COVID-19 and consequential ripple effect on annual meetings. We track (i) pre-COVID state law requirements for shareholder meeting format, (ii) states’ implementation of mandatory stay-at-home orders, (iii) executive and/or legislative actions addressing annual meetings during COVID (e.g., exemptions from stay-at-home orders, authorization of virtual meetings, waiver of notice requirements), and (iv) company responses to these changes. The results provide a comprehensive picture of the 2020 annual meeting environment that influenced companies’ adoptions of virtual meetings.

As to the annual meetings themselves, we track and explore shareholder voting turnout and voting outcomes for 1,874 companies that convened annual meetings between March 11, 2020 and June 30, 2020 and compare the results for each of these companies in 2020 to the two preceding years. We also look in-depth on week-by-week basis at shareholder proposals and success rates compared to previous years both at annual meetings and special meetings.

Not surprisingly, we find that COVID-19 forced a dramatic shift in the annual meeting practices of the vast majority of companies. Many of these companies had not originally planned for, or previously tried, virtual or telephonic meetings and had to quickly pivot to a virtual platform with little warning for their pre-scheduled annual shareholder meetings.  However, despite the often-hurried changes, companies that moved to virtual annual meetings in 2020 did not experience a significant impact on voting turnout as compared to those same metrics in 2019. The overall shareholder voting turnout and proposal approval rates decreased only by about 2% from 2019 to 2020, with certain weeks during the relevant time frame experiencing larger and smaller drops in shareholder vote turnout. With the largest drop seen the week of April 13, the decrease in turnout and approval could likely be explained by the pandemic itself. Concerns related to safety and wellbeing likely overshadowed participation in meetings despite, rather than because of, the new virtual format.

The data reveals differences in turnout and approval rates depending on (i) the meeting method adopted by the company—hybrid, in-person, telephonic, or interactive video; (ii) market capitalization; and (iii) proposal topic. Specifically, annual meetings held over the phone without an interactive video component had the lowest shareholder voting turnout and approval rates of any meeting method. We posit that more interactive methods promote more discussion, and reduce shareholder angst, which may explain the decrease in shareholder turnout and approval. Further, we find non-Indexed companies had the largest decrease in shareholder turnout and approval from 2019 to 2020. These small companies were more susceptible to volatility in the transition to virtual meetings, but they now have the technology in place to alter the virtual shareholder experience in the future.

Finally, based on the data collected for all special meetings held in 2018, 2019, and the period between March 11, 2020 and June 30, 2020, special meetings were more volatile in 2020 than annual meetings held during this same time period, with a greater decrease in the average votes cast as a percent of shares outstanding than their annual meeting counterpart—5% versus 2%, respectively. Similarly, the average votes for, as a percent of votes cast, decreased by 2% from 2019 to 2020 for annual meetings, while the same metric for special meetings decreased by 11% during the same time period. This is particularly interesting since many special meetings are convened in order to vote on major corporate decisions such as charter amendments and approval of major corporate transactions—the types of key issues that ordinarily garner robust participation of shareholders.

Reimagining the annual meeting

Over the past two decades, corporate America has seen a renaissance of the shareholder franchise as a mechanism for impacting the governance of the corporation. From proxy fights, to withhold campaigns, to say on pay votes, today’s shareholders routinely leverage their investment and voting power to challenge management and influence corporate decision making. The annual meeting should, in theory, offer another opportunity to bolster shareholder engagement by guaranteeing shareholders the opportunity to exercise the right to vote at least once per year.

More importantly, beyond serving as a mere platform for voting, the annual meeting was originally envisioned in corporate theory as serving a broader democratic function. The annual meeting was designed to act as the primary space for authentic and organic shareholder interaction with directors, management, and each other.  Notably, as ownership of public corporations has become more dispersed and institutional investors holdings continue to increase, the modern annual meeting falls well short of this ideal in most cases. Today, the vast majority of shareholders do not attend the annual meeting and instead vote by a written proxy, if at all. Even the few shareholders who do attend the meeting have been criticized as not being representative of the general shareholder body. The annual meeting has become largely pro forma, with voting results often known even before the meeting has started.

But a virtual meeting offers the opportunity to reclaim that important facet of shareholder democracy. Rather than a constraint imposed on companies and shareholders, we argue that virtual meetings offer an opportunity to re-imagine the role annual meetings have in our corporate governance landscape. With these goals in mind, we underscore the potential of virtual annual meetings to improve shareholder democracy, engagement, and feedback, rather than focusing on some of the understandable issues that issuers faced in the rapid move to virtual setting due to COVID-19:

  • The accessibility of virtual meetings can increase retail investor turnout (in particular millennials who are open to new technology and have been taking larger roles as shareholders). Further, investors, with holdings in multiple companies, can more easily attend all of their annual meetings, many of which occur within the same time frame.
  • Relatedly, providing investors of all stripes with a meaningful opportunity to participate in the annual meeting helps ensure that corporate deliberation and action reflects the views of all shareholders.
  • If structured properly, online platforms can be leveraged to promote meaningful participation rather than stifling it. In some situations, this may require new company guidelines or rules surrounding shareholder participation including presenting proposals and Q&A sessions.
  • Virtual meetings can increase transparency and participation of other stakeholders, through making meetings accessible in real-time to non-shareholder constituents and/or making recordings of the meetings available for later viewing.

In order to achieve these goals, however, we believe that courts, proxy advisors, and companies themselves should favorably treat virtual and hybrid meetings that are meant to improve engagement rather than detract from it. Meetings must be structured in a manner that makes participation seamless and easy. Requiring shareholders to go through red tape or limiting their opportunity to engage with management and each other without good reason is counterproductive and therefore should merit increased scrutiny. Legislators, too, should consider easing the (non-COVID) restrictions on virtual meetings—allowing companies and shareholders to explore the various formats through which meetings can take place.

Whether virtual meetings will persist at such high rates moving forward is unclear. Undoubtedly, some companies will revert back to traditional, in-person annual meetings, as soon as it is safe to do so. For many other companies, however, virtual meetings may become a permanent fixture taking the form of either fully virtual or hybrid annual meetings. Moreover, with the uncertainty surrounding when the public health crisis arising from COVID-19 will be resolved, companies may be forced to host another annual meeting season remotely in 2021 whether they want to or not. Virtual meetings are thus poised to play an influential role in corporate practice. We, therefore, should use this as an opportunity to meaningfully revisit the annual meeting’s purpose and the role that technology can play in promoting it.

The complete paper is available here.

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