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Companies hope new rules will lower the cost of communicating with anonymous shareholders.
Alix Stuart, CFO Magazine
November 1, 2010
Finance executives want shareholders to come out of hiding, if for no other reason than to lower the costs of communicating with them.
Toward that end, for the past several months the Securities and Exchange Commission has been soliciting comments on so-called proxy plumbing, the processes that determine, among other things, how proxies get into the hands of shareholders who hold shares through a broker — in particular, the 50% to 60% of those "objecting beneficial owners" (OBOs) who elect to remain anonymous.
While it may sound arcane, the effort has touched a nerve and has garnered more than 50 comment letters to date.
The current OBO designation "has outlived its usefulness," wrote Daniel Reynolds, CFO of Calloway's Nursery, a 19-store garden-center chain in Texas, in his letter. "The existing rules clearly inhibit issuers from effectively communicating with investors, and add cost and complexity to the proxy process."
Currently, companies must provide proxies to their anonymous shareholders, and typically do so by reimbursing brokerage firms for the fees those firms pay to third-party specialists, of which Broadridge Financial Solutions is by far the largest.
This practice creates a situation in which "our company has no choice in selecting a proxy service provider, exerts little to no control over the services that are actually provided, and has no ability to negotiate fees with the service provider," wrote Ann Marie W. Hunker, controller for residential homebuilder M/I Homes.
The lack of transparency and direct contact with shareholders means a company may be hit with a variety of unanticipated charges. Jeffrey Williams, CFO of America's CarMart, a $339 million operator of auto dealers, wrote to the SEC to complain about a $3,014.10 bill from brokerage firm FolioFN Investments. Williams was shocked to learn that the company was being charged to send proxy materials to some investors who held only fractional shares and thus could not vote. Ultimately, only nine FolioFN investors voted their shares, translating into an "outrageous price" to the company, Williams wrote. "Legal or not, this is simply not right!… The entire arrangement was clearly set up to take advantage of companies like us."
While many observers anticipate new rules that will increase competition and lower fees, few expect to reap such rewards soon. Paul Conn, president of global capital markets at Computershare/Georgeson, a global transfer agent and proxy solicitor, says he "would expect some change to the system," but not before 2012, and far short of "a big bang."