Holding Your Annual Meeting Virtually—Lessons Learned From 2020

In light of the circumstances surrounding the COVID-19 pandemic, it comes as no surprise that there was a dramatic increase in the number of virtual shareholder meetings held during the 2020 proxy season compared to prior years. According to data from Broadridge with respect to meetings hosted on its platform, the number of virtual shareholder meetings increased from 248 in 2019 to 1,494 in 2020. In many cases, having a virtual shareholder meeting was unavoidable in order to comply with government restrictions and guidelines on public gatherings, as well as to ensure the health and safety of shareholders and company employees. Given the uncertainty for 2021, particularly as it relates to the continuously evolving COVID-19 situation, companies will likely again find themselves planning for the possibility of a virtual shareholder meeting for the 2021 proxy season. Below is a summary of key considerations and best practices that companies should think about—whether holding a virtual shareholder meeting for the first time or having already done so previously.

Key Considerations

Review whether state law and the company’s corporate governance documents permit the company to conduct a virtual or hybrid (i.e., attending either in-person or virtually) shareholder meeting. While many states permit companies to hold virtual or hybrid shareholder meetings, some either impose additional requirements or do not permit them at all. For example, while Delaware permits shareholder meetings conducted solely by remote communication, Delaware law requires companies to make the list of shareholders entitled to vote at the meeting available during the entirety of the meeting on a reasonably accessible electronic network. Companies should carefully review and monitor applicable state laws and any limitations imposed on holding virtual or hybrid shareholder meetings. Similarly, companies should review their charter and bylaws to ensure there are no prohibitions or restrictions on holding virtual or hybrid shareholder meetings. In some cases, the organization documents may need to be amended in order to permit such meetings.

Determine the meeting format. In addition to determining whether to hold a virtual or hybrid meeting, companies will also need to consider whether the meeting will be audio-only or with video. If holding an audio-only meeting, companies will still need to incorporate virtual shareholder meeting technology that will enable shareholder authentication and voting through a secure website. While audio-only meetings have historically been the prevalent format and are generally easier to conduct from a technology and equipment perspective, providing a video broadcast may better replicate the in-person experience for shareholders and allows shareholders, for example, to see the body language of directors. Further, companies should also consider the items that will be voted on at the meeting in taking into account how a virtual meeting will support or facilitate those discussions.

Monitor changes to policies from proxy advisory firms and institutional investors. Institutional Shareholder Services (“ISS”) and Glass Lewis have updated their voting guidelines for 2021 and companies should continue to monitor these policies for changes with respect to virtual meeting matters. For example, Glass Lewis’ policy with respect to virtual-only shareholder meetings has been to generally recommend voting against members of the governance committee where the board is planning to hold a virtual-only shareholder meeting and adequate disclosure is not provided in the proxy statement. In this regard, Glass Lewis requires companies to provide robust disclosure to ensure that shareholders will be afforded the same rights and opportunities to participate as they would at an in-person meeting. This policy was previously suspended through June 30, 2020 due to the COVID-19 pandemic but is currently in effect and will remain so for the 2021 proxy season according to Glass Lewis’ recent policy updates.

For the 2021 proxy season, ISS has now adopted a new policy whereby ISS will generally vote in favor of management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. ISS also encourages companies to disclose the circumstances under which virtual-only meetings would be held and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting.

Companies should also be mindful of the voting policies of institutional investors, which historically have not been in favor of virtual meetings. Given the situation with COVID-19, many of these institutional investors relaxed their positions during this past proxy season. Whether they continue to do so for the 2021 proxy season remains to be seen, particularly where a company has provided enhanced proxy disclosure.

Decide on a virtual meeting service provider. Although a select few companies may choose to handle their virtual meeting in-house, our experience is that most will choose to outsource to a virtual meeting service provider. It is generally worthwhile for companies to start their selection process early in order to evaluate the different service offerings, as well as to reserve the company’s meeting date with a service provider. Costs may vary significantly with service providers; however, in many cases, it may be worth going with a party that has extensive experience with the virtual meeting process in addition to being able to handle other related aspects of running annual meetings, such as broker search, tabulation, document distribution, proxy voting, etc. For companies that have previously used a particular service provider for a virtual or hybrid meeting, a thoughtful review of what worked and what needed improvement, especially with regards to any technology issues, should provide a meaningful basis for deciding whether alternative service providers should be considered.

Best Practices to Consider

• Prepare clear instructions in plain English on how shareholders can attend a virtual or hybrid meeting to be included in the proxy statement, as well as on the company’s website.
• Provide as much time in advance for a shareholder to obtain any required unique identifier or control number, legal proxy or other information needed to enter the meeting.
• Reach out to the company’s largest holders in advance of the meeting to make sure they know how to access the meeting.
• Establish formal rules of conduct to ensure transparency, including clearly addressing the process for handling shareholder questions, such as creating timelines and limits for questions/comments, addressing when and how questions can be submitted and when and how they will be answered, establishing guidelines for behavior that is out of order, etc.
• Ensure that a technical support line or chat feature is available that ideally allows for real-time communication on each page of the meeting platform for shareholders to resolve issues during the meeting.
• Conduct multiple dry runs in advance with “actors” to practice with the technology, as well as to get familiar with the flow of the meeting.
• Consider posting all appropriate questions received during the meeting, along with the company’s responses, on the company’s website within a reasonable time after the meeting.
• Have a contingency plan in place in case there is a major technical glitch or failure, including working with the service provider ahead of time to make sure the plan can be readily implemented.
• Archive the audio/video of the meeting and make it available on the company’s website.

Environmental, Social and Governance Trends and Development

Summary. A tumultuous 2020, with COVID-19 and the Black Lives Matter movement playing prominent roles in politics and social discourse, brought with it an intensified focus on companies’ environmental, social and governance (“ESG”) practices and disclosures. In addition to diversity, gender pay disparities and environmental matters, which we highlighted in last year’s Corporate Communicator, over the past 12 months SEC reporting companies have added or amplified their disclosures around employee health and safety and business continuity. Following is a brief summary of some of the ESG trends we are seeing:

Employee Health and Safety and Business Continuity. COVID-19 has highlighted how the country was in many respects unprepared for a global pandemic. While companies should continue to evaluate and revise their disclosures regarding their response to COVID-19, even once the current pandemic is behind us, companies will likely be subject to a new standard in public company disclosures that highlights, both in terms of employee health and safe and business continuity, their preparedness for similar events in the future.

Diversity. While diversity has been a hot topic in ESG disclosures for quite some time, the events of 2020 have highlighted that the country continues to have a long way to go to achieve equality, and public reporting companies will likely continue to be scrutinized for their efforts in this area. COVID-19 cast a light on several social inequities. Minorities, who tended to be overrepresented in lower-paid jobs, were among those hit hardest by workforce reductions. Minorities also tended to be heavily concentrated in specific sectors (i.e. elder care and retail and grocery delivery) that were deemed essential but kept them in positions where they were among those most likely to be exposed to the disease. On top of that, the tragic killing of George Floyd drew attention to the issue of systemic racism in both public and private institutions.

These matters have captured the attention of the world at large and we continue to see laws passed that seek to address inequality.

As an example, California recently passed AB-979, a law requiring public companies with their principal executive offices located in California to have at least one or more directors be from an “underrepresented community.” The law requires such a corporation to, no later than December 31, 2021, have at least one director from an “underrepresented community” on its board of directors. The law applies a sliding scale for board diversity for future years based on the size of the board. By no later than December 31, 2022, AB-979 will require board representation as follows: (i) corporations with four or fewer directors must have a minimum of one director from an underrepresented community; (ii) corporations with more than four but fewer than nine directors must have a minimum of two directors from an underrepresented community; and (iii) corporations with nine or more directors must have at least three directors from an underrepresented community.

More recently, on December 1, 2020, Nasdaq filed with the SEC a rule proposal that would require all listed companies to disclose board diversity statistics and to satisfy specified board diversity requirements. Companies that do not meet the required diversity requirements would be required to explain why they did not meet them. The diversity statistics would be required to be disclosed within one year while companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule. For the diversity requirements, companies would be required to have at least two diverse board members, consisting of one woman and one director from either an underrepresented minority group (Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander or two or more races or ethnicities), or one that identifies as lesbian, gay, bisexual or transgender.

Environmental. Environmental stewardship continues to be of major interest to the investing community, and as a result, plays a prominent role in public disclosures. It has become commonplace for companies to describe their investment in and commitment to environmental sustainability. Increasingly, issuers also highlight steps they are taking to combat climate change and reduce greenhouse gas emissions. Of particular note, however, is that companies’ disclosures are becoming much more granular in the sense that we have seen more companies include quantitative metrics surrounding matters such as their emissions reductions and energy consumption. In last year’s Corporate Communicator, we described ISS’ new Climate Awareness Scorecard, which, according to ISS, “distills and harmonizes publicly available data and ISS proprietary analysis on a company’s climate change-related disclosures, practices, and performance record, including its industry risk group.” The increase in quantitative disclosures regarding environmental metrics should make it easier to make such cross-company comparisons regarding environmental stewardship and is a trend we are likely to see accelerate. Mandated disclosure requirements remain a controversial topic influenced by political undertones. In response to a recent SEC Subcommittee recommendation that the agency adopt standards requiring the disclosure of material ESG risks, Republican Commissioner Hester M. Peirce responded to the Subcommittee by suggesting that investment managers should “ . . . not ask companies to spend their investors’ precious time and resources incorporating all manner of ESG minutiae into their public filings.”¹⁷

Political Spending / Lobbying. Having just emerged from an incredibly divisive election amidst an era of growing political polarization, it should be no surprise that political spending is an issue of growing interest to company stakeholders. In its 2020 CPA-Zicklin Index, the non-partisan Center for Political Accountability (CPA) reported, “the Trump years (2016-2020) have proven to be a boom time for corporate political disclosure and accountability. Indeed, increases have occurred since 2015 and strengthened since 2016. Especially striking are the increases in company adoption of board oversight and more detailed committee review of political spending.” As evidence of that, in its June newsletter the CPA reported that shareholder backing for proxy proposals in support of political spending disclosure hit record highs in the 2020 proxy season. Although these votes are nonbinding, boards do need to weigh heavily the results, as lack of responsiveness to precatory proposals could have implications for directors in regards to their duties under state law and its impact on future voting recommendations of the proxy advisory firms.

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Notes:

• ¹ CF Disclosure Guidance: Topic 9 (Issued March 25, 2020) and CF Disclosure Guidance: Topic 9A (issued June 23, 2020). 
• ² For a discussion of recently adopted changes to Regulation S-K, Item 101, Item 105 and Item 303 see “SEC Reporting Update”.
• ³ See id. 
• ⁴ See id. 
• ⁵ See Ernst & Young LLP, SEC Reporting Update, Highlights of trends in 2020 SEC comment letters (Sept. 2020). 
• ⁶ See id. 
• ⁷ See id. 
• ⁸ See id. 
• ⁹ See id. 
• ¹⁰ See id. 
• ¹¹ See id. 
• ¹² As a sharp illustration, in September 2020, the SEC settled an enforcement action against BMW for inaccurate disclosures of its retail sales in the United States, which BMW had held out as a key performance indicator. See In re Bayerische Motoren Werke Aktiengesellschaft, BMW of North America, LLC, and BMW US Capital, LLC (SEC Admin. Proc. File No. 3-20060; Sept. 24, 2020). 
• ¹³ Regulation S-K, Item 303(a)(3)(ii). See also the discussion of recently adopted changes to this standard under “SEC Reporting Update—November Amendments—Item 303: Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 
• ¹⁴ See In re Diageo plc (SEC Admin. Proc. File No. 3-19701; Feb. 19, 2020). 
• ¹⁵ See In re HP, Inc. (SEC Admin. Proc. File No. 3-20112; Sept. 30, 2020). 
• ¹⁶ See In re Hilton Worldwide Holdings Inc. (SEC Admin. Proc. File No. 3-20109; Sept. 30, 2020). 
• ¹⁷ See Securities and Exchange Commissioner Hester M. Peirce, Opening remarks at the December 1, 2020 Meeting of the Asset Management Advisory Committee (Dec. 1, 2020).