As Savings Grow, E-Proxy Services Boom

Paperless proxies are saving corporations millions of dollars.

At Automatic Data Processing alone, the $8 billion outsourcing giant says its customers save more than $700 million annually by using ADP to communicate with their shareholders electronically, eliminating the cost of printing and mailing materials. And as ADP racks up profits from the business, competitors are jumping into the game as well.

“This season we will have eliminated over 45 percent of all physical mailings,” Chuck Callan, senior vice president of regulatory affairs for ADP, says in an interview. “We have driven the application of technology to shareholder communications and proxy voting, and it’s helped to increase the participation of investors and cost savings.”

The use of electronic communications with shareholders is rising, and with it the practice of online proxy voting. ADP’s Proxy Edge platform alone serves 2,600 institutional investors, who use it to receive materials and vote, and the company’s Proxyvote.com service is used by about 14 million individuals, Callan says. In all, ADP estimates that its technology enables the company to reach 87 million investors, and that it can contact the owners of about 70 percent of shares held at third parties such as broker-dealers or custodian banks in less than 24 hours, Callan says.

Vanguard Group recognized the potential cost savings of electronic shareholder communications when it hired ADP to handle two proxy votes for its mutual funds in 1998 and 2002. Investors of its funds were voting on some policy changes, and were given the option to participate online, via telephone or by mail. Many chose to vote by telephone or on the Internet, and the money saved went right back into the Vanguard funds, spokesman John Demming says.

“The Web is the most cost effective way of doing it,” Demming says. “That savings goes to the funds and contributes to lowering the funds’ expense ratios.”

“The Strangest Of All Businesses”

The growth of the online proxy market has started to attract other players as well, who expect that companies will want to outsource their shareholder communications function instead of developing their own systems internally.

Faulk

“It’s not as simple as it looks,” says Anne Faulk, chief executive officer of Swingvote Corp. in Atlanta. “It took us a year and a half to design and build it. The more user friendly it is, the more complex it is to build. I would say if you’re going to roll out a sophisticated product, you should have started a couple of years ago.”

Swingvote started by serving institutional investors with a tool that allowed money managers to see all of their accounts across banks and brokerages, access all the details of various proxy proposals, and find information on their firms’ proxy policies. Now the company is developing a tool that will allow retail investors to research the same information that institutional investors use.

Technology is being used to “empower the retail voter,” Faulk says. “We can offer custodians the ability to roll out a platform that delivers, takes the vote, educates the investors, and gives them simplified tools to participate in the corporate governance process.”

Typically, companies such as ADP distribute proxy materials to account holders on behalf of a broker or custodian bank. The issuer of the shares, the corporation, pays for the distribution.

“It’s the strangest of all businesses,” Faulk says. “The investment managers hire us. The companies pay us, which is why a custodian, a bank or a brokerage firm would not want to take the IT dollars to build [a system] in-house.”

ADP also contracts with about 600 corporations for the distribution and tabulation of proxy materials and votes for registered shareholders, Callan says.

Direct Communication

The increased use of electronic delivery and voting systems has caught the attention of the Securities and Exchange Commission, which currently is reviewing a proposal on the Internet availability of proxy materials. The proposal is pending, subject to a review by the Commission’s staff of comments submitted by companies and organizations, SEC spokesman John Heine says.

The Business Roundtable, a Washington, D.C.-based association of chief executive officers of leading U.S. corporations, advocates that the SEC should revise current rules so that companies have the option, and ability, to communicate directly with individual shareholders, regardless of whether the stock is owned through an institutional account.

“Companies don’t like the fact that they don’t know who their owners are,” says Geoff Loftus, vice president at the Society of Corporate Secretaries and Governance Professionals.

Changes in corporate governance have increased the importance of direct communication between companies and their shareholders, says Tom Lehner, director of public policy for the Business Roundtable. The group has submitted two letters to the SEC supporting changes that would allow companies to avoid the use of third parties to reach their stockholders.

Lehner

“We’ve always talked about the importance of boards having processes in place where they can be responsive to shareholder inquiries,” Lehner says. “We’re trying to have the SEC revise the current system so that companies could communicate directly with their individual shareholders as opposed to institutional shareholders. Companies should not have to go to a third party to reach their shareholders.”

The unintended consequences of the proposal are that certain demographic groups, such as seniors, may be disproportionately affected by the changes, says ADP’s Callan, citing an analysis by Forrester Research. Of 42 million households, about 8 million aren’t online, and about 25 million don’t have broadband access at home, making electronic delivery of materials and voting difficult, he says.

Over time, this issue will likely lessen as the use of electronic communications becomes more commonplace, Loftus says.

What may have a bigger effect is whether the online proxy services provide ways to educate, and therefore engage, individual investors. Individuals often don’t vote because they don’t feel they know enough to participate in the process, Swingvote’s Faulk says.

“Corporate governance issues are in the business section every day. Even retail investors know now with Enron, et cetera, that you can invest in what you think is a fundamentally sound company and have executives loot the value,” Faulk says. “We’re taking the expertise and knowledge that institutional investors had and simplifying it, giving retail investors enough information so that they can feel comfortable participating in the process. We think the retail vote will go up dramatically.”