broadridge

The secret power player behind almost all shareholder votes

February 13, 2014: 10:24 AM ET

Few people outside the clubby world of corporate paperwork have ever heard of Broadridge, but it has a near-monopoly in running the annual proxy season.

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FORTUNE -- If you own stock in public companies, you know this is the time of year you get barraged by electronic and snail mail notices telling you it's time to vote on slates of directors and other items.

What you might not know is that those notices probably aren't being sent by the companies whose shares you own or by the brokerage house that's holding your shares. Chances are the company pulling the strings is Broadridge Financial Solutions (BR).

Broadridge, which few people outside the clubby world of corporate paperwork have ever heard of, has a near-monopoly in running the annual proxy season, and exercises more power than its relatively small size ($2.4 billion of annual revenues) may suggest.

Why should you care? Because Broadridge, various regulators, and the brokers that hold your shares have set up a system that's so loaded in favor of corporate management that companies have little incentive to push for a more competitive system. Second, under the current system, you have no way to know if your vote has been counted properly.

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If you are like most investors, your broker holds your shares and is required to make sure you get your annual proxy statements. According to the SEC, rather than doing it themselves, almost all brokers outsource this chore to Broadridge -- and the companies whose shares you own are required to pay Broadridge for this work based on an amount set by regulators. In October, the SEC quietly signed off on a new and complicated regulatory proxy fee schedule recommended by the New York Stock Exchange (NYSE).

Broadridge's influence was clear during the fee setting process. Broadridge told regulators that it doesn't separately track costs for proxy activities, yet regulators depended on Broadridge's assertions and its unaudited cost estimates to make their fee determinations, sometimes without the information the regulators requested because Broadridge declined to provide it. The fact that no audits were performed on the data Broadridge supplied displeased some members of both the investment and corporate communities, including the Investment Company Institute (ICI) and the National Investor Relations Institute (NIRI), among others. The SEC approved the fee changes anyway.

Harold Westervelt, president of INVeShare, a pint-size competitor of Broadridge's, supported the new fees and says they give even his small operation a more than ample profit margin. His firm benefits from what he refers to as inflated pricing, and he told me if the regulators wanted to lower the cost of delivery by, say, 10%, he'd be happy with that. "Cost-plus on a monopoly is crazy," he says.

The brokerage industry's trade group, the Securities Industry and Financial Markets Association (SIFMA), supported the new fee structure. Some brokers benefit from the rates because Broadridge gives them rebates based on what Chuck Callan, SVP of regulatory affairs at Broadridge, says are "arms-length" negotiations. While Callan would not describe the negotiations beyond that, Westervelt says Broadridge doesn't shy away from "combining services in a negotiation -- and making sure a firm knows" that if you don't do proxy processing "with Broadridge, then the other costs go up." (SIFMA declined repeated requests for comment.)

How did Broadridge become such a dominant player? It all began in 1985, when the SEC determined that "an intermediary is necessary to the effective implementation of the shareholder communication system," and picked a company called IECA as the intermediary between brokers and companies. Former IECA chief executive Jim Chard told me that the company's idea was to perform work "cheaper than the back offices of brokers could." He describes IECA's business model and its designation as the intermediary as "coups."

Broadridge's current CEO Rich Daly used to work for IECA. Soon after he joined ADP in 1989, IECA alleged that he had taken trade secrets from them. Both sides made allegations related to competitive practices. Chard says ADP would go to their broker customers and "give away the proxy processing for free." ADP and IECA settled lawsuits between the two firms in 1992 with ADP's purchase of IECA. In 2007, ADP spun off its brokerage group services business to "better enable both companies to capitalize on significant opportunities for growth," with Daly running what is now Broadridge.

Broadridge's special role as intermediary has granted the data processor an in with brokers and a long reach into a whole host of governance arenas. Broadridge has pushed hard to expand, and has received regulatory help in doing so. In 2008, amid lobbying from Broadridge, the SEC issued rules to facilitate electronic shareholder forums that allow companies and shareholders to communicate.

Broadridge has also created a related business in the area of virtual shareholder meetings. These meetings are problematic because they often lack the transparency of a live meeting. If a shareholder asks a question in a live meeting, you know whether it's been answered, and you know what the answer was. In a virtual meeting, without controls in place, the questions that companies find uncomfortable may never see the light of day, and no one but the questioner is the wiser. Because of the controversies, many companies who use the service now offer joint online and in-person meetings.

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Some institutional shareholders have raised alarms about ways in which Broadridge's proxyvote.com and its investor mailbox voting platforms are stacked in favor of management. As a result, the SEC recently disallowed a "vote all items with management" button. But the Council of Institutional Investors (CII) remains concerned that if an investor using these systems omits a vote on an item, the electronic platforms automatically cast that non-vote as a vote for management.

CII wrote to the SEC that Broadridge's practices may violate current broker voting rules. Callan says if the SEC requires a change through rule making, they'll change their practices.

Last proxy season, Broadridge angered shareholders when it acquiesced to a request by SIFMA and refused to disclose interim vote counts to shareholders who introduced a proxy proposal requesting JPMorgan Chase (JPM) split the CEO and chairman roles. JPMorgan, of course, got the interim vote information from Broadridge. CII wrote to SEC chair Mary Jo White citing the lack of fairness in Broadridge's operations and the absence of regulatory oversight of proxy distributors. In a flurry that sent corporate lawyers into high gear over the last few days, Broadridge announced and then reversed changes on who would get interim votes going forward.

In 2010, the SEC issued a report on the U.S. proxy system that outlined a rat's nest of problems like vote miscounts and a lack of controls and audit trails. Other than Broadridge's regulatory proxy fees, the major concerns in the report have not received attention.

Regulators have made no progress addressing the most critical problem of the current system: making sure votes get counted accurately. "Because of the inability to ascertain the integrity of the votes cast by" owners with shares at a bank or broker, investors have concerns "that it may be difficult to assess the accuracy of the current proxy system as a whole," the SEC wrote. The SEC said that shareholders "should be able to confirm that the votes they cast have been timely received and accurately recorded and included in the tabulation of votes," but there's currently no way to do that.

The SEC's report describes sloppy broker recordkeeping, practices resulting in over and under voting of shares, and a lack of controls throughout the process. Because of these problems, you may end up getting all your shares voted the way you directed -- or you may not. Occasionally, problems come to light, such as a 2008 case involving Yahoo in which Capital Research Global Investors, a large shareholder, questioned the tallies. However, as a general matter, it's impossible to know the size of the voting problems in the system today.

But how would it benefit Broadridge to annoy -- or even enrage -- its clients by requiring changes? Without a "regulatory push," brokers are unlikely to undertake the expense to track your voting rights accurately, Professors Henry Hu and Bernard Black wrote in a 2008 paper. It's a quagmire -- and the SEC has no plans to challenge the practices of Broadridge and its broker clients.

Broadridge is pressing to expand its services. It purchased a transfer agent company in 2010 to perform proxy-related services directly for companies. And on his November conference call with analysts, Daly announced that the SEC's approval of the new regulatory fee schedule "will drive accelerated adoption of our Investor Mailbox product and will also add to our growing digital solutions."

With regulatory assistance, Broadridge is on track to control nearly every aspect of U.S. corporate voting. When you receive your notices this proxy season, it would be nice to know someone was minding the monopoly -- and ensuring your vote counts.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board education and advisory firm.

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