Enshrined in corporate governance codes worldwide, the annual shareholder meeting is a central pillar for discharging the duties of transparency, shareholder engagement and accountability. This direct dialogue between shareholders and the board is viewed as a vital aspect of governance and, in this time of intense uncertainty, it is arguably more important than ever that shareholders have the opportunity to engage. But in the fight against the coronavirus pandemic, governments around the world have placed limitations on the number of people permitted together in public—right in the middle of the annual reporting season. This leaves many companies with a pressing problem: how to fulfill their governance obligations at a social distance. Can a virtual shareholder meeting serve instead?
Advances in virtual meeting technology and widespread high-speed internet connectivity mean holding a virtual annual meeting is now far more feasible than it was even three years ago, but technical factors are not the only issue. What are the benefits, drawbacks and regulatory issues around remote shareholder meetings, and how can companies deliver an effective meeting that satisfies requirements and safeguards shareholder rights?
Virtual annual meeting aversion
Virtual annual meetings have been slow to gain traction. Designer shoe brand Jimmy Choo was the first company to hold a fully remote shareholder meeting, on June 15, 2016—having previously amended its articles by shareholder vote to enable it to do so—but until the pandemic, relatively few companies had followed their example. While virtual annual meetings are slightly more common in the US, the traditional approach is still preferred in Europe and Asia-Pacific.
There are some clear benefits to remote shareholder meetings. They are cost-effective, because they don’t require large venues or hospitality services. They are convenient for attendees and, as the general level of comfort with remote meeting technology grows, they might even attract more participants than the traditional approach. However, despite these advantages, virtual annual meetings have remained the exception, not the rule.
Part of this reticence is undoubtedly down to the majority view among proxy advisors, who have historically opposed virtual-only meetings, considering in-person shareholder meetings an essential route of access to the board and a pillar of good governance. Proxy advisors have voiced concerns that companies might hide behind the access limitations of virtual meeting platforms to dodge difficult questions. Commenting in the Financial Times recently, Sarah Wilson, Chief Executive of UK–based proxy advisor Minerva, noted that if virtual annual meetings aren’t handled carefully, they can invite significant risks for shareholders.
A recent Diligent peer discussion among UK company secretaries echoed these concerns, also noting that remote annual meetings put shareholders at a disadvantage because they are unable to gauge a chair or director’s physical response to questions as they are asked. This is an important consideration, since body language and facial expressions factor significantly into communication impact and understanding. Losing these non-verbal cues creates a real disadvantage.
Company secretaries are also concerned that shareholders will find it more difficult to interact with board directors and question them appropriately. If shareholder voices cannot be heard, one of the primary functions of the annual meeting is lost and governance is eroded.
Accessibility is a further concern. While access to technology and connectivity has grown significantly over recent years, it may be erroneous to assume that all those who wish to participate in an annual shareholder meeting are equipped with, or confident to use, the technology to do so. This is particularly true for older shareholders, and those who have physical challenges that make using videoconferencing technology difficult.
Nevertheless, the COVID-19 pandemic has plunged businesses into a world where reservations about virtual annual meetings must be secondary to public health considerations. Like it or not, if a company is going to hold its annual meeting in the coming months, a remote shareholder meeting is the only way.
Challenges to consider when holding a virtual annual meeting
Companies face distinct challenges when preparing for and holding a virtual annual meeting in the current environment. A company’s bylaws and articles of incorporation must permit virtual or hybrid shareholder meetings before one may be convened. Many companies have already amended their articles in this way—as Jimmy Choo did prior to switching to all-virtual annual meetings—but those that haven’t will struggle, because changes to articles require confirmation by a vote of 75% of shareholders, which cannot be achieved without a physical meeting. Some governments, such as Germany and the UK, have introduced legislation to permit virtual meetings, while others are in the process of updating their guidance.
Companies whose articles do not permit virtual annual meetings will be forced to hold their meetings behind closed doors, clearly an unpopular action with shareholders. Responsible investment charity Shareaction has suggested that, in these circumstances, companies should hold an online meeting immediately prior to their annual meeting, to provide an opportunity for board-shareholder interaction.
The key governance challenges around remote shareholder meetings center on ensuring that shareholder rights can be fully exercised when the format changes. Ensuring that there is sufficient opportunity for shareholders to ask questions and follow them up, or register objections, is one of the most obvious difficulties. Questions may be invited in advance, but a mechanism for follow-up questions is hard to devise, even with the technology options available.
Companies will need to decide whether to run in-event voting via an electronic voting solution or how to manage votes otherwise. This will entail verifying participant identities and right to vote and engaging a third party—such as auditors or legal teams—to count and verify votes and present outcomes in a way that respects voter anonymity.
Finally, the technology question must be addressed. There are several videoconferencing platforms that could be leveraged for a virtual annual meeting, but each has its weaknesses. Company secretaries and governance teams will need to work closely with their IT and data security teams to ensure that the best option is chosen with a clear plan for execution (including invitations, attendee tech support, etc.).
Best practices for remote annual meetings
Effective communication with shareholders is essential. If notices have already been issued prior to the decision to pivot to a virtual meeting, updates will be needed. These should be issued through multiple channels including email, hard copy if that remains an option and via corporate and investor relations websites and market update mechanisms.
All communications must be crystal clear. They should explain why the change in format has been made and link directly to the government’s compulsory measures. They should set out the process for running the meeting and how attendees will be able to participate and vote. Virtual attendees should be encouraged to submit questions in advance and to exercise their proxy vote on resolutions to be considered during the meeting.
The company should also communicate the process if it is not possible to answer all questions during the event—this could take the form of written answers posted to the company website, for example. Communications should also include advice to attendees to regularly consult the company’s website for updates about annual meeting arrangements.
Do a dry run. It is essential that those leading the virtual shareholder meeting are confident with the platform they are using. A dry run lets the chair and other directors iron out wrinkles and see how the mechanics of taking questions and switching between presenters will work in practice. Boards need to also consider whether there will be an option for attendees to ask follow-up questions and how this will work.
Consult and evaluate post-event. Following the virtual annual meeting, post-event communications should take the opportunity to gain attendee views on the format and areas for improvement. They should also direct attendees to post-event materials such as online responses to submitted questions and meeting recordings, if available. Directors and executives should also contribute their views and recommendations about the virtual format.
Whether the experience of the 2020 season will be a watershed heralding new era of virtual annual meetings, or act only as a stopgap until a return to a more traditional format is possible remains to be seen, but there is no doubt that corporate boards and investors will have much to consider once this very different annual meeting season draws to a close.
For more information, watch the replay of our webinar: Best Practices for Virtual AGMs and the Future of (Remote) Work