Shareholder Access: The High Cost of Proxy Solicitations

This Blog often comments on the cost imposed on shareholders of mounting a proxy campaign. These costs make a proxy contest prohibitively expensive, largely eliminating the ability of shareholders to nominate directors. It is one reason why the current rule proposal to give certain shareholders access to the company's proxy statement for nominees to the board makes sense. It will reduce (but not eliminate) the costs associated with a proxy contest.

Even with access, however, proxy contests can be expensive. Access merely permits the shareholder to include the nominee (or proposal) in the company's proxy statement and proxy card. It does not, for example, cover any subsequent mailing to shareholders designed to encourage them to vote for the nominee/proposal. Those "subsequent" mailings can be expensive, as we see from the campaign by Investors Against Genocide’s (“IAG”) with respect to a shareholder proposal submitted to the Fidelity funds. 

We previously reported on IAG's campaign to have various mutual funds adopt “genocide-free” investment policies. Genocide-free investment is based on the notion of divesting from oil companies that have contracts in Sudan that provide funding for the Sudanese government, which allows the government to pay for arms and troops to carry out systematic genocide againstits citizens. IAG has expanded the campaign to urge funds to not hold stocks in companies whose business directly or indirectly supports genocide in any country, now or in the future. As of March 31, 2009, Vanguard, for example, held stocks in four of the oil companies operating most closely with the Sudanese government.

The SEC refused to issue a no-action letter when IAG first asked Fidelity funds to include the proposal in its proxy statement last year. The resolution was included, and gathered a surprising first-time approval percentage of 20%-31%. IAG has again included the genocide-free investment resolution in the proxy statements for both Fidelity (vote July 15) and Vanguard funds (vote July 2). Thus, the funds have to pay the cost of distributing the proposal to shareholders as part of their proxy materials.

IAG, however, wanted to distribute materials to support the resolution and inquired about the costs of mailing and/or emailing letters to shareholders of the various funds. Vanguard advised IAG of the following costs for snail mail statements to be sent to shareholders. The partial list includes the costs provided by Vanguard for 22 of the 30 funds which have the resolution pending for a July 2nd vote. (IAG selected funds on the basis that holders of these are likely to also be holders of the most popular funds, so duplication of shareholders could be reduced.):

TOTAL MAILING COSTS 22 FUNDS                       $4,424,396

IAG is a modest nonprofit organization that cannot afford these mailing costs. Of course, at $4,424,396, the amount would stretch the budget of even the most well-financed insurgent. 
 

IAG Chairperson Eric Cohen explored the possibility of sending email correspondence in the hope of reducing costs. Vanguard estimates that 25% of shareholders have agreed to receive emailed proxies. Nonetheless, even this entailed a signficant cost. Vanguard estimated a cost of $.04 per record to identify the shareholders who have agreed to receive email proxies ($64,680 for just the 500 Index fund record holders), plus $.08 per person to send the message, versus approximately $.50 per shareholder for snail mail.

Fidelity estimates that emailing to the 5% of approximately 6.5 million record and beneficial holders in one fund, Fidelity Cash Reserves, who have agreed to email delivery will cost $93,708, with a one-time setup charge of $22,050 to create an e-delivery system.

Vanguard has freely provided the information regarding proxy distribution costs to IAG but not Fidelity. Unlike last year, Fidelity charged IAG $5900 to simply provide an estimate of what an emailing would cost for two funds.

IAG opted to send email solicitations to shareholders of one fund, Vanguard Equity Income (VEIPX), who have agreed to receive emails, a communication that costs $5500-$7000. The solicitation has gone out, and is generating feedback and interest.

Large corporations have long been the target of shareholder activism resulting in (mostly unsuccessful) efforts to have resolutions included in proxy statements, but evidently mutual funds are new to this experience. Both Fidelity and Vanguard indicated to Mr. Cohen that this is the first time the funds have been faced with shareholder resolutions in a proxy statement and the complications that a solicitation involves. (If any of our readers know of other shareholder proposals that have successfully made it onto a mutual fund proxy statement, we would like to hear about it.)

In sum, while shareholders—i.e. owners—of companies (or in this case, trusts) have the legal right to access the company’s resources to include a briefly-worded proposal in the proxy statement, that right is essentially meaningless. The costs to do so are prohibitive for most shareholders, even using information technology that should reduce communication costs.