Over the last several years, government agencies, institutional investors, and proxy advisory firms have been seeking greater corporate transparency in public filings to build trust and improve corporate governance. However, such efforts would be better served on a level playing field, as currently not all shareholders are required to play by the same rules of transparency.
Unlike “registered” shareholders (“record holders”) who hold their shares directly with a public company, beneficial owners (“street name shareholders”) hold their shares indirectly, through a brokerage firm or other financial intermediary (custodian), which serves as the beneficial owner’s point of contact in the receipt of proxy materials.
Under a shareholder communication framework established by the Securities and Exchange Commission in the mid-1980s, beneficial owners are classified as either objecting beneficial owners (“OBOs”) or non-objecting beneficial owners (“NOBOs”). OBOs are beneficial owners who do not want their name, address, and share positions disclosed to the company’s management by the broker or intermediary, while NOBOs do not object to such information being disclosed. Companies may obtain a list of their NOBO holders, but for a fee. Which depending on the size of the company and its shareholder base could cost in range of tens of thousands of dollars, if not higher.
Many of these OBO accounts are high net-worth individuals, hedge funds and foreign investors who hide their identity and share positions from management. The ability to mask your identity along with your ownership in a company, at a time when greater transparency and open communications are being demanded of boards and management, is an antiquated and unfair advantage that is both costly and extremely disruptive to management teams who are working to run and drive the business for the benefit of all stakeholders.
At a time when companies are expected to be more and more transparent, the SEC’s shareholder communication framework has not changed in more than four decades. For companies, it gives OBOs an unfair advantage to demand, “We want to know everything that you do, but we don’t want you to know who we are.”-
The current OBO/NOBO classification also places an unfair burden on registered owners and those beneficial owners who do choose to provide their names, addresses, and share positions. To pass both complex proposals as well as those required to run a company’s day-to-day operations, companies need to secure voting support from their shareholders. Having an unidentifiable shareholder segment with a meaningful share position can easily cause havoc to the outcome of a shareholder meeting.
Consider the common scenario of a high net-worth investor, such as a hedge fund, owning 100,000 shares as an OBO or an OBO population that owns 25% or more of a company. Because the company cannot engage with these beneficial owners directly, management must double down on its outreach efforts by attempting to contact 1,000 or 10,000 accessible investors who own 1,000 shares each. Imagine how much more efficient and cost effective that outreach campaign would be if management could reach out to that single beneficial owner, whose identity is fully disclosed, with 100,000 shares directly.
The current SEC’s shareholder communication framework also has an unintended impact on the smaller issuer community. It is very often small companies that unfairly endure most of the costs of a shareholder outreach campaign. Smaller companies are mostly owned by individual retail investors. It is well-established that retail investors are less likely to vote in corporate elections than large institutional investors. Too often, I have heard companies say it is not worth the time and expense to get a key vote because it’s too much of an uphill battle. There have been situations where a smaller issuer was in desperate need of passing a financing or bylaw amendment proposal and they were unable to secure sufficient investor voting due to a sizeable OBO population.
The impact is even more damaging in the mutual fund and ETF industry where the predominate investors are retail holders and the costs of soliciting proxies are typically borne directly by the shareholders. The OBO class directly raises the costs and difficulty with mutual fund and ETF proxy solicitations thus negatively impacting retail investors, many times costing millions of dollars per vote more than it should.
Additionally, the current OBO/NOBO shareholder communication framework adds another layer of unnecessary expense onto the company because they’re stuck paying exorbitant intermediary fees to process proxy materials and it encourages that communications take place over electronic mail or “snail mail”, rather than directly from issuer to investor.
Management should be able to effectively engage with all their beneficial owners directly, without the interference and cost of an intermediary. This process would drastically improve the shareholder communication process, expedite shareholder votes, and lower operational expenses.
It is time for policymakers in Washington to level the playing field and make the rules of transparency apply to companies and beneficial owners alike.