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The Starting Line: Virtual shareholder meetings flop

A certain law lets companies hold shareholder meetings solely online, but critics complain it could put shareholders' rights in jeopardy.

You can research stocks, review them, and even purchase them completely online. But once you've actually bought the stock, you're back to the real world.

Annual reports, proxies and other corporate documentation are still shipped out by paper mail to shareholders every year. Shareholders still gather annually for a physical meeting with the board of directors. And although there have been some changes in the law to move things into the age of cyberspace, most observers say that the physical world will be with us for some time.

And maybe that's for good reason. Advocates say it's in the shareholders' interest to keep meetings in person and that moving them online could put their rights in jeopardy.

However, Delaware has already passed one law, and Massachusetts is working another that would allow companies to communicate with shareholders electronically and even hold shareholders' meetings online. While these new rules make it easier to disseminate information, critics charge that they also allow corporations to avoid confrontation.

While the federal government does have rules governing corporations' relations with their shareholders, laws of the state where the company is incorporated generally cover these issues. Since many companies--including about half of the Fortune 500--are incorporated in Delaware, that state tends to be at the advance of any new trends.

The Delaware law, which went into effect last year, allows a company to hold its annual meeting solely online. But to date, no company has done so.

The chief complaint about virtual meetings is that they prevent shareholders from going head to head with management.

"One of the rights of ownership clearly established after the Great Depression...was the right to hold management accountable," said Amy Domini, president of the Domini Social Equity Fund and one of the opponents of the Massachusetts bill. "Those rights include the ability to go to an annual meeting to hear them speak and to raise questions from the floor, like 'how much do you pay yourself?' and 'why are you moving your headquarters?'--whatever they want.

"Already physically today you have management just turn off the mike and say, 'we don't want to hear from you,' but they can't physically turn (shareholders) away. You go online and the sky's (the) limit. You can have a phony person pretending to be a real person, zero accountability, and total control by management of the owners," she argued.

Time to rewind, rework?
That was one of the reasons that Massachusetts pulled back on its bill, said state Senator David P. Magnani, the bill's sponsor. Currently, the legislature is working on a bill that would allow companies to communicate with shareholders via e-mail, instead of through regular mail.

And some speculate that Delaware may even ease up on its law.

"I would imagine somewhere down the road they would revisit this," said Charles Elson, director of the center for corporate governance at the University of Delaware. "No one has (held a meeting solely online) and no one will. The surest way to encourage substantial shareholder ire and potentially run afoul of possible legal constraints would be to do that."

That doesn't mean that companies will discard the Internet as a communications tool, however. In the wake of new federal regulations requiring greater disclosure from companies, many businesses now broadcast analyst briefings and other speeches over the Internet. It's not a big leap to see that technology spreading to annual meetings.

And most think that's a good thing, as long as the physical meetings remain as well. For one thing, putting the meetings online would allow shareholders who don't live near the meeting location to hear what is being said.

"For the large companies you get a good turnout. But for many, many other smaller companies, these are just friends and family functions," said Debra Berliner Barda, senior vice president at G.S. Schwartz in New York, which helps companies handle public relations and investor relations. "You can see it when you look at...investor conference calls (which) were not open to the public in the past. Now when you look at participation levels, you get many, many more people. I think you would see the same trend in annual meetings."

Allowing investors to communicate with boards electronically may even help them get their voices heard, by allowing them to send questions through e-mail.

Not soup yet
While Webcasting seems to have a promising future, other technological innovations, including online notification and online voting, may take some time. Even if laws allow companies to handle such matters over the Internet, security issues may hold back progress.

Even a task as seemingly simple as forwarding documentation to shareholders could be somewhat complex, because some investors don't hold securities in their own name, but instead allow their brokers to hold the stocks in their name.

In that case, a company would have no way of getting the shareholder's e-mail address and would have to rely on the brokerage to forward the documentation.

And online voting raises the same security issues that online banking does, requiring shareholders to get secure IDs and secure connections.

But regardless of the problems, most people involved with the matter say that expanding the process to include new forms of communication should only benefit investors.

"If you take a typical look at shareholder votes on board-of-director-initiated proposals vs. shareholder-initiated proposals, board proposals usually get a 90 percent approval and shareholder proposals usually get a 5 percent approval. So you can't say there's ever been any meaningful input by shareholders from that standpoint," said Donald H. Meiers, a partner at Holland & Knight and a former adviser with the Securities and Exchange Commission.

"The way I look at it is you have a greater chance for interaction by virtue of simulcast over the Internet," Meiers said. "People who may not be able to participate are at least able to get questions out over e-mail. I view this as very much positive for shareholders."