Hidden Challenge of Virtual ASMs
Authored in partnership with Abernathy MacGregor
Increased attendance is just one potential side effect of hosting Virtual Annual Stockholder Meetings
Virtual shareholder meetings are a relatively novel concept in the world of corporate governance. Despite the rapid rise of technology in all parts of our life, only a small number of public companies in the United States have taken up this innovation. This is primarily due to strong push back from proxy advisory firms and certain influential institutional investors that view these virtual meetings as yet another way for Boards to evade scrutiny. Some states also either do not permit virtual meetings or permit them only if they occur concurrently with physical in-person meetings (so-called hybrid meetings).
As a result of the novel coronavirus (COVID-19) all philosophical and many logistical barriers to pursuing virtual shareholder meetings have fallen almost overnight, at least for the 2020 proxy season. Amidst various degrees of physical impossibility due to shutter in place orders and bans on travel, the proxy advisory firms have suspended their policies of recommending votes against certain directors if the company hosts a virtual ASM, and many institutional investors have similarly suspended policies to vote against directors in these circumstances. At the same time, many states that did previously not permit virtual ASMs have issued executive orders allowing them. The SEC has also issued guidance that makes it relatively simple for a company that was originally intending to host an in-person meeting to switch to a virtual ASM. The result is a nearly 300% expected increase in virtual ASM’s in 2020 according to Broadridge.
While many in the governance field have bemoaned this move as necessary now but a long-term step backward, it is worth considering the alternative. The race to virtual ASMs may very well bring new and greater attention to shareholder meetings.
Traditionally, the reality was that unless you were one of the largest consumer brand companies in the U.S., attendance at in-person ASMs was virtually almost zero. Only the most devoted shareholders would make the effort. But now, if every aspect of our life has gone remote, why should we assume ASMs won’t move in the same direction? The near entirety of the professional workforce will have spent hundreds if not thousands of hours on video calls. The world is learning a new skill.
This is the hidden challenge for corporate leaders hosting virtual ASMs in 2020: Falling into the assumption that the quiet doldrums of an in-person ASM will present nothing but a technical challenge to move a quiet, perfunctory event online. Board directors, management teams and corporate secretaries should consider the following to be sure they are not caught flat-footed if their once quiet in-person ASM becomes a crowded affair online.
- Get ahead of it – The simplest way to prepare is for investor relations officers to make sure they call around and ask if investors are planning to attend. This is an easy task that often gets taken for granted for those with low attendance normally and should not be overlooked when shifting online. If you have shareholder proposals, you should communicate with the proponents to devise a process for them to present their shareholder proposals at the virtual ASM. Also, if you have a shareholder or management proposal on the proxy you should expect increased attendance at your online meeting.
- Rehearse – It has never been more important for Boards and Management teams to rehearse the full annual meeting process. The simple reality is that a virtual ASM is a technical challenge for a Board even if everyone was able to be together. But since management and directors are not likely to all be in the same place, responding to questions or making prepared remarks should all be carefully choreographed and rehearsed. Additionally, if investors are planning to attend, technical difficulties or poor Board attendance will not reflect well on the ability of the Board or management to lead in a crisis.
- Scenario plan – Many board directors, management teams and corporate secretaries understand how to run an effective meeting, even one where vocal shareholders look to be disruptive in-person. How those instincts play themselves out online is very much up in the air. Corporate secretaries should work through a short number of broad scenarios to be sure all the key players know exactly how to reach each other, what is the preferred response and who is on point to deliver the response. Key scenarios include questions from shareholders with a proposal, unexpected questions from shareholders, requests for questions from employees and a technology failure. The rules of conduct for the annual meeting should also be reviewed with an eye toward ensuring an orderly virtual meeting process. Finally, there should be a plan for responding to an increased volume of shareholder questions, particularly if not all of them can be addressed during the allotted time set aside for the virtual ASM.
- Think about media – With few exceptions, the media has not attended many shareholder meetings in recent years. While many reporters will be focused elsewhere, corporate secretaries should expect media may look to attend the virtual meeting since it may now be easier and more enticing for them to do so. Both the explosion of virtual meetings and the interest in how Boards are addressing the global pandemic crisis is of interest to media.
- Address the pandemic – The ASM will be the only real venue for the board to publicly address shareholders on how the company is managing through the crisis. We recommend directors plan to address how the company is managing through the challenges of the global pandemic, how it is protecting workers (especially essential workforce) and what it views to be the enduring attributes of the organization. Carefully consider Regulation FD when preparing and delivering these remarks.
- Talk to the future of virtual ASMs - While the entire world is moving to virtual work, the reality is that the governance world remains skeptical of virtual ASMs. It is important that directors plan to address the Board’s view on virtual ASMs going forward. Most investors expect some sort of commitment to return to in-person ASMs when the risks of the pandemic have subsided. However, the reality is that virtual ASMs are a new tool not yet fully understood. Boards and management should be prepared to articulate the pros and cons of these meetings and how they will evaluate the use of a virtual ASM in the future.