Online Proxies Could Spur Shareholder Participation
December 19, 2005
by Hannah Glover
A recent ruling from the Securities and Exchange Commission may help lighten the mail carrier's load, save some trees and even shave a few points from the expense ratios of certain mutual funds, if it becomes law.
But some say that if passed, the pending law, which allows electronic delivery of shareholder proxy materials, could have a greater effect: increase the communication between fund managers and those who invest with them.
"The Internet is so important to so many people," said Gary Levine, chief financial officer for the Bancroft Convertible Fund. "Having the materials delivered electronically is much more useful to people than opening an envelope," he said.
With gadgets like mobile telephones and BlackBerry devices unshackling people from their desks and e-mail diverting many people's interest in things that come in envelopes, online delivery of proxy materials might encourage those who couldn't be bothered with dense, printed proxies to click through electronic versions of the reports, instead. Most importantly, well-designed electronic delivery may even encourage more shareholders to vote.
It's too soon to tell, though. The SEC's Nov. 29 unanimous ruling is subject to a 60-day public comment period, and, if passed, the law would not likely take effect until 2007. So last week, in anticipation of the close-end fund's annual meeting and vote, Bancroft mailed out printed copies of the first in a series of legally mandated materials.
By the time shareholders convene on Bancroft's Morristown, N.J., headquarters in February, Levine would not be surprised if fewer than half of all shareholders cast ballots, he said, whether in person, by phone or via mail-in postcard.
"Most people couldn't be bothered to send anything back," he said.
Such apathy is not unique to Bancroft. "Mutual funds, particularly, are notorious for adjourning votes because they can't get a quorum," said Chris Traulsen, a senior analyst with Chicago-based Morningstar. "Anything that would encourage a higher participation rate would be good," he said.
"Funds want to be good citizens," said Kenneth S. Janke, Sr., chairman of BetterInvesting, a division of the National Association of Investors of Madison Heights, Mich. Proxies offer an opportunity to communicate with shareholders, he said. "Companies would want to do that," Janke said.
The problem is that the average investor spends far more time looking for new opportunities than he does tracking the progress of the companies and funds in which he already invests, according to Janke. By their nature, unlike direct stocks, where the investor must diligently track the operations of a company, people choose funds often because they have managers who do the picking, watching and swapping for them. Finally, proxy materials in general don't make for fun reading.
"People are busy, said Leonard Rosenthal, a professor of finance at Bentley College in Waltham, Mass. "I wouldn't be surprised if a lot of folks don't even look at these," he added.
And printed proxies don't come cheap. Bancroft, for example, lists "reports to shareholders" as an operational cost of $33,838 in its 2004 annual report. In 2005, the MFS International New Discovery Fund budgeted more than $347,000 for printing and postage alone, according to that fund's annual report.
"You're talking about multiple mailings with multiple envelopes, and if there is more than one account [at a household], sometimes several to the same house," said Anita Green, vice president of social research at Pax World Funds.
Pax shareholders are always asking to be sent less paper, according to Green. Of those who do vote, roughly half cast their ballots by telephone or Internet. Yet all receive the bulky hard-copy mailings required by the SEC.
The SEC proposal would replace multiple mailings with one postcard to notify those who are interested in electronic copies of reports and documents where to find them. The card would also include instructions on how to order old-fashioned paper copies to those who want it. This way, companies could cut printing costs, while investors could unclog their mailboxes.
Of course, the cost of proxy printing and mailing pales in comparison to the 1.5% to 3% funds charge shareholders to cover management and brokerage costs, Rosenthal noted. More importantly is how online proxies could impact the way fund managers communicate with shareholders.
As an open-ended fund, Pax, for example, is required to hold annual shareholder meetings, at which it holds proxy votes. "Sometimes, in between meetings, you would like to propose something to shareholders, but we are reticent to do so," Green said, citing costs as a deterrent.
In fact, most mutual funds rarely hold votes. "It's not unusual to go 10 years without seeing a shareholder vote," said Mercer Bullard, of Fund Democracy, a shareholder advocacy group based in Oxford, Miss. In fact, regulations only require funds to hold votes on large issues, such as mergers or advisor and independent auditor contracts.
But acclimating investors to expecting detailed information on-line could change that, said Carl T. Hagberg, a shareholder communications consultant and principal of Carl T. Hagberg and Associates in Jackson, N.J. And companies that use online proxies to increase shareholder communications will truly profit, Hagberg said. "With all the scandals and questions investors have, companies need to communicate with their shareholders," Hagberg added.
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