- While overall the share of virtual annual meetings among Russell 3000 firms has increased to 7.7 percent, the number of new adopters has decreased in each of the last two years.
- There does not seem to be a link between governance structure and company meeting format. Companies with virtual meetings appear no more likely to have poor governance provisions.
- Similarly, the dissent levels on key voting items such as say-on-pay and director election appear to not vary materially for both physical and virtual meeting holders.
- When adopting a new meeting format, companies and shareholders should evaluate key considerations to protect shareholder rights and address both concrete and perceived risks associated with a virtual meeting format.
Meeting format proliferation
Supporters of virtual shareholder meetings hail the benefits of giving more shareholders the opportunity to attend and actively participate in annual meetings, while reducing the cost to shareholders. Critics emphasize that the intangible benefits of in-person interaction could be lost, and that virtual meetings could also present problems with standard meeting procedures (such as presenting shareholder proposals). They argue that the virtual meeting format could give boards too much sway over the discussion and allow boards to avoid uncomfortable questions more easily.
While physical shareholder meetings remain, by far, the most common approach for U.S. companies, the number of virtual meeting in the Russell 3000 has tripled since 2014. Given this growth and the ongoing debate on the merits of virtual meetings, understanding the potential benefits and risks of this format as well as the characteristics of companies that adopt the practice appears pivotal to forming a stance on the issue.
In the traditional physical meeting format, the board, management, and shareholders gather in a pre-arranged location. Shareholder meetings for U.S. companies take place all over the country and in certain cases even outside the U.S. Depending on the shareholder base, the location may influence how many shareholders can easily attend. Both the sheer number of annual meetings of portfolio companies as well as the cost of attending are barriers for many shareholders. Virtual meetings, where shareholders can attend meetings all over the world via a webcast, aim to address those barriers.
Shareholder meeting terminology:
Physical meeting: Shareholders and company representatives gather in a physical location. No remote attendance available.
Webcast meeting: Shareholders and company representatives gather in a physical location, and the proceedings are available to shareholders via webcast or teleconference. Certain opportunities may not be provided to remote participants, such as presenting shareholder proposals.
Virtual meeting: Shareholders and company representatives gather virtually only; no in-person attendance is available. All opportunities afforded to shareholders at a physical meeting are offered virtually.
Hybrid meeting: Shareholders have the opportunity to attend either a physical meeting or a virtual meeting. All opportunities afforded to shareholders at the physical meeting are available virtually.
Best practices specific to virtual shareholder meetings continue to develop since virtual shareholder meetings are still a relatively new phenomenon. On a fundamental level, companies adopting a virtual meeting format must comply with relevant state of incorporation regulations and applicable listing requirements as well as their own bylaws. In addition, companies must have the technical and security capabilities to ensure the meeting follows comparable standards to physical meetings (such as participant verification, record keeping etc.). Moreover, the overall shareholder base should have comparable opportunity to participate.The best meeting format for a given company depends on legal & bylaw requirements as well as best practices that emerge over time. Overall hybrid meetings may best balance meeting approaches by expanding the group of shareholders while also addressing the concerns of not losing the benefits of in person discussions. However, hybrid meetings currently account for less than 1% of annual meetings and their year-over-year growth lags considerably behind virtual meetings.
Virtual meetings considerations
As virtual meetings are still a relatively new phenomenon, best practices are still emerging. At a minimum the meeting format a company chooses must meet the respective exchange requirements. Moreover, the format must ensure that shareholders can exercise all rights granted under the state of incorporation can be fully exercised. Lastly, the format needs to meet a company’s bylaw requirements.
Beyond these minimum standards, companies and shareholders need to feel confident that the annual meeting format will afford all stakeholders a fair, complete, effective, and secure forum. Among the things that should be evaluated are:
- Will the virtual meeting format result in broader meeting attendance?
- Does the company have the right technical capabilities (in particular, the participant verification process and record keeping) to meet standards comparable to that a of physical meeting?
- Does the virtual meeting platform provide all participants with adequate security?
- Does the virtual meeting format actually save the company money, after ensuring that the right cyber and procedural safeguards are in place?
- How will the company ensure fairness in questions that are allowed and moderated during the meeting? What criteria will be used to evaluate questions to be presented?
- How does the company intend to address issues, including technical and procedural issues, that may arise due to the virtual meeting format?
- Does the company intend to solicit feedback from shareholders regarding the virtual meeting format? How will that feedback be collected?
- Does the company propose to provide an alternative forum for person-to-person interaction among the company, board, and shareholders?
Before switching the meeting format, companies may need to consult with key shareholders to understand if there are any concerns with the switch and how those concerns should be addressed. Designing the meeting structure with the specific needs of the shareholder base in mind will likely make the transition smoother.
What can happen when best practices are not followed became evident at this year’s AGM at General Motors. Shareholders filed a Notice of Exempt Solicitation urged to vote against the Chairman and CEO Mary Barra, Lead Director Tim Solso, and governance committee chair Patricia Russo due to the company’s decision to hold a virtual shareholder meeting and avoid uncomfortable discussions (“Who wants to stand in front of a live audience and explain shrinking sales, epic recalls and loss of market share? It is so much easier to explain it to a microphone.”).
Communication and IT firms lead the way in virtual meeting adoption
While virtual meetings have increased across sectors, our analysis showed no significant difference between S&P 500 companies and the rest of the Russell 3000. While most sectors have seen year-over-year increases in the adoption of the format, the Information Technology and Communications Services sectors have led the way. As discussed above, a range of factors go into choosing a meeting format. For IT and Communications Services companies, being ahead on technology trends reflects their core business. It’s unsurprising to find a higher prevalence of virtual meeting adopters in this group.
While a small group of companies seems to have experimented with different meeting formats over the past five years, a majority of companies stick to a new format once making the switch. In terms of new virtual meeting adopters, our analysis suggests that pace of adoption has slowed over the past couple of years.
Virtual meeting uptake has also slowed. This may suggest that companies value in-person interaction to communicate their vision for the company and the company’s progress. Engagement on a wider range of issues including social and environmental concerns across sectors is growing and many companies already have an ongoing dialog with a wider range of their shareholder base over the course of the year. As such virtual meetings may provide an alternative to physical meetings for a subset of companies. At present, they appear unlikely to become the norm.
Virtual meeting adopters, on average, do not have poor governance structures
Unlike several European markets, there is no requirement in the U.S. to obtain shareholder approval to switch from a physical to a virtual meeting format. Some skeptics believe that companies shifting to virtual meetings may have certain governance features that discourage them from facing shareholders in person. With this concern in mind, we analyzed the data to determine if, in aggregate, patters exist to support this notion. The analysis looks at companies both listed and incorporated in the U.S. from July 2014 to June 2019 in the Russell 3000.1
Companies where the most recent meeting was virtual appear to have a slightly higher share of controlling shareholders and unequal voting rights. Looking at the sector distribution of companies in the virtual meeting group, the IT and Communication Services sector rank high. These sectors are known for having a higher concentration of these governance structures. In general, governance structures and practices appear comparable for both virtual and physical meeting groups.
Our analysis did not reveal significant differences in shareholder dissent as a measure of alignment of company and shareholder stances on key voting proposals – from say-on-pay to director elections.
Future of Virtual Meetings
Companies that have adopted a virtual meeting format and those who have stuck to the physical meeting format all seem to have comparable governance structures and practices. Looking at shareholder vote dissent as a proxy for alignment between companies and shareholder, our analysis found no significant difference in opposition levels on key voting items.
All meeting formats have potential drawbacks and benefits. Companies adopting virtual meetings should follow best practices that protect shareholder rights and the meeting format overall is conducive to similar interactions as physical shareholder meetings.
While overall the proportion of virtual meetings has increased, the rate of new adoption has slowed. In an age where ongoing shareholder engagement on a wide range of topics is increasingly the norm, companies appear to value the benefits of in-person interaction. Hybrid meetings, which allow both virtual and physical participation, may strike the best balance by expanding the group of shareholders while also maintaining the benefits of in-person discussions.
1: In our analysis we could only identify two bylaw amendment proposals to switch to a virtual meeting format last year – received by a Russell 3000 firm incorporated in the U.K. (Gates Industrial Corporation plc) and a non-Russell 3000 company (Achieve Life Sciences, Inc). There were two shareholder proposals filed since July 2014 asking companies to hold “In-Person Shareholder Meetings” (in 2018 American at Outdoor Brands Corporation and in 2017 at Hewlett Packard Enterprise Company). Both proposals were omitted due to either dealing with the ordinary course of business of the company or not meeting the stock ownership requirements.
This post comes to us from Institutional Shareholder Services. It is based on the firm’s memorandum, “Virtual Shareholder Meetings in the U.S.: 2019 Update,” dated September 26, 2019.