How do shareholders attend an annual meeting if there's nowhere to go? That's not a trick question. Inforte Corp., a $32.7 million customer strategy and solutions consulting company based in Chicago that went public in 2000, has held its annual meetings in cyberspace ever since. A year later, $107.4 million ICU Medical, a medical device manufacturer headquartered in San Clemente, Calif., abandoned brick-and-mortar meetings, too.
"Our president and chief executive officer, Dr. Lopez, is a big believer in the intelligent use of technology," says Lynn DeMartini, secretary to the chief executive officer and event coordinator at ICU Medical. According to DeMartini, the key goals in holding the meetings online were reducing costs and making it easier for shareholders to attend.
But ICU is only one of a few companies that have held annual meetings online, and securities experts currently don't see any indications that large numbers of public companies will move to "online-only" meetings. The reasons most frequently given: Legal ambiguity and shareholders' concerns about the practice.
To wit, a few companies have recently backed-off the practice. Siebel Systems announced its intention to hold its 2003 annual meeting online-only, but reversed course under pressure from shareholder groups and the press.
Similarly, CIBER, Inc., a systems integration consultancy based in Greenwood Village, Colorado, held its May 2002 annual meeting online. Since then, however, the company has held physical meetings that are also broadcast online. "CIBER feels that it's important to allow its shareholders the choice of physically attending the meeting or listening in online," says director of investor relations Douglas Eisenbrandt.
More companies seem to be moving towards CIBER's model, holding both physical and online meetings. According to OpenCompany.info, an earnings call calendar managed by Maynard, Mass.-based Shareholder.com, the number of companies broadcasting their physical meetings online rose by one-third between 2001 and 2002, and by another one-fourth between 2002 and 2003. Providing a webcast of a meeting costs between several thousand and $30,000, says Ronald Gruner, president of Shareholder.com.
For smaller companies on the lower-end of Gruner's scale, that can mean significant savings. ICU Medical cut the cost of its annual meeting by about 75 percent by holding it online, says controller Scott Lamb. Shareholders should benefit, he notes, as the money will flow through to the bottom line. That could help the stock price, or leave more cash to be distributed as dividends.
Slipping By
The manner in which companies hold their annual meetings is regulated by state law. Not surprisingly, these regulations were developed long before online meetings were possible, so the laws in many states don't address the validity of online-only meetings. Delaware is the exception; it explicitly allows online-only shareholder meetings. Ciber, ICU Medical and Inforte all are incorporated in Delaware.
Those three companies have taken advantage of the 2000 Technology Amendments to Delaware corporate law that took effect in July 2000. "The stockholder meeting provision was part of a year-long analysis to clarify how you use technology under corporate law," says Rick Geisenberger, Assistant Secretary of State in Delaware, "It covered a broad panoply of technology issues."
The Securities and Exchange Commission has not yet publicly commented on the propriety of online-only meetings, says spokesperson John Nestor. "In general, the Commission has taken the position that access to a computer should not be a prerequisite to protection under the securities law."
The provision horrified organizations representing shareholders. "Delaware slipped that law by in June 2000," says Nell Minnow, editor at The Corporate Library, "There were no hearings, no discussions."
Minnow supports electronic access to annual meetings, but not to replace a physical meeting. "It's very important that shareholders have the opportunity to look people in the eye," she says.
A number of shareholder groups have voiced concerns that electronic-only meetings cede too much control to management. "This is the one time that shareholders actually get to talk to companies' management and boards," says Tracey Rembert, coordinator of advocacy and public policy with the Social Investment Forum, Washington, D.C. "There's a concern that management could choose which questions to answer."
Moore
Then, there's the issue of accessibility. "The key downside is the inability of many shareholders to have access and participate," says Cheryl Moore, Dallas-based partner with the law firm of Patton Boggs, LLP. "They may be physically impaired, elderly or not have the technical skills."
The Council of Institutional Investors actually sent a letter to all Delaware public companies asking them to continue physical meetings and later enshrined its opposition in a policy statement. "Companies should hold shareholder meetings by remote communication (so-called electronic or 'cyber' meetings) only as a supplement to traditional in-person shareholder meetings, not as a substitute."
"We think things like electronic town hall meetings and electronic access are all to the good," says CII Director of Research Elliot Schwartz, "But we insist on face-to-face annual meetings."
Schwartz worries that shareholders cannot verify the directors' presence over the Internet, and that companies can screen questions.
Impact Of 9/11?
While the concerns of institutional investors are valid, others point out that online meetings can be more—or at least no less—accessible than physical meetings. Small shareholders that can't spend the time or money traveling to a physical meeting should be able to more easily and cheaply participate in an online meeting.
Skeel
Many companies schedule annual meetings in places that are relatively inaccessible to most shareholders, anyway, says David Skeel, professor of law at the University of Pennsylvania. He adds, however, that he doesn't favor doing away with them.
The terrorist attacks on the World Trade Center on Sept. 11 may have also had an impact on annual meeting attendance, as airline travel diminished significantly. Some securities experts note that the general tone of the country after "9/11" may create an environment more open to considering online annual meetings.
But even before Sept. 11, few shareholders actually attend physical meetings. "Most shareholders are rationally apathetic," says Skeel. With little invested in any one firm, it often doesn't make sense for them to spend time and money attending annual meetings.
"A lot of CEO's are afraid," says Dieter Waizenegger, a research analyst in the AFL-CIO's Office of Investments. "They don't like to have to answer uncomfortable questions."
The AFL-CIO touched off a storm when it found neither the CEO nor the directors attended Dana's 2003 annual meeting, held at its lawyers' offices in Richmond, Va., nowhere near headquarters in Toledo, Ohio. "The Internet opens up more opportunities for CEOs and the board to avoid accountability. You have to wonder who is there," he says.
In July 2002, Walden Asset Management, an advocate of socially responsible investing, urged the New York Stock Exchange to require in-person annual meetings in its governance code. Walden argued that not all shareholders have access to computers, the "relatively modest cost" is money well spent, and "annual meetings are one of the few opportunities for top management and the Board to interact directly with a broad cross-section of their shareholders."
Although the NYSE rejected the suggestion, Walden's letter signaled activist shareholders would not give up their bully pulpit without a fight.
The Smaller The Better
Friedman
"Electronic voting is a good thing for small holders, it might lead to more votes being cast," says Abe Friedman, Chief Policy Officer at Glass Lewis & Co. "But you can do that without having an electronic meeting."
Friedman believes companies need to put less distance between themselves and shareholders, not more. "There's no substitute for face-to-face meetings," he says, "It's an opportunity for shareholders to express their views or raise whatever issues may exist with the board. That's rare enough as it is."
Inforte and ICU Medical have small share registers dominated by a few large holders. "We have less than 150 registered shareholders, and they don't all live nearby," says DeMartini at ICU Medical.
"It didn’t make any sense to hold a meeting for two dozen people, 10 of whom are employees," notes MeMartini. Electronic meetings have saved money, although not in the first year. "We talked to everyone," she says, "Our attorneys, ADP, Mellon, the NASD, the SEC, the Council of Institutional Investors, Delaware."
By the second year, DeMartini had the necessary contacts with vendors and the legal costs disappeared. "I worked with the attorneys the first year, and did it on my own the second year," she says, "It can’t be that hard if I can do it. I'm a secretary."
"We're not standing on principle," says Craig Dooley, marketing executive at Inforte. "It works exceptionally well for us, but it might not for a larger company with more stakeholders."
Inforte gets about the same number of participants as for its quarterly updates, which also take place online. "They include representatives of big shareholders, analysts and some other third parties interested in what we do," says Dooley. "Perhaps 50 or so." Inforte takes questions from all participants, not just shareholders. "If the questions are relevant, we’re happy to answer," says Dooley.
Online annual meetings may also be increasingly relevant to family-dominate public companies and private companies. "Think of the family shareholders of [privately-held] Mars," says Geisenberger at the Delaware Secretary of State office. "Why shouldn't they be able to hold annual meetings electronically?"
The Mechanics
ICU Medical shareholders can participate either by telephone or on the Internet. "The Web part is for folks who want to participate passively; the conference call is for those without Internet access or who wish to raise questions," says DeMartini.
Inforte uses the Internet only, although shareholders can send their ballot by facsimile if they wish to vote at the meeting and the company accepts questions by facsimile as well as e-mail. "We use the time while votes are tallied to answer questions," Dooley says.
Both companies send out physical proxy materials, including a proxy card, though Inforte delivers materials electronically to shareholders who request it. Shareholders can use the card or submit proxies over the Internet or by telephone. "We haven't had any issues with solicitation," says Dooley. "The proxy goes out to everyone, and it explains how to access the meeting."
Neither company has faced a stockholder proposal or proxy fight at their electronic meetings. "So far the shareholders who have asked questions are people the CFO knows," says DeMartini. "Our biggest concern is that everything goes smoothly," she adds. "It's allowed us to have more control over the process."
Other states have not followed Delaware's example. The AFL-CIO and other shareholder activists blocked efforts to change Massachusetts's law in 2002. "It's taking away shareholder democracy," says Waizenegger.
An American Society of Corporate Secretaries survey found 54 out of 205 companies made this year's annual meeting available on the Web, including 36 live Webcasts. While the proportion of companies broadcasting proceedings over the Internet will surely grow, cyberspace meetings seem destined to remain a curiosity—at least for the short term.
Karen M. Kroll contributed to this report
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