It’s the time of year when winter is but a memory (for most of us), taxes have been filed and proxies are filling our mailboxes. As I review the filings and determine how to cast my votes, I’m struck with one of these off-the-wall thoughts that hit me every now and again. I wondered how much was earned – and the margins derived – via the annual proxy season. I didn’t delve into the number of trees sacrificed though I’ll wager it’s fewer than before electronic transmissions.
I uncovered an article in Fortune that laid out part of the case – although slightly biased. Broadridge has a near monopoly on the process (which I knew already and one of the reasons I’m a shareholder), but what exactly is the process and the profitability? Note: Inveshare, Inc., referred to in the article, was acquired by Broadridge in September 2016. From Jonathan Kalman: INVeSHARE disrupts the shareholder communications market by providing broker-dealers with an innovative platform based on blockchain technology with advanced workflow, business processes and management reporting tools designed to solve broker-dealer needs at significantly improved economics). My key takeaway from the article is Harold Westervelt saying, “… (the fees) give even his small operation a more than ample profit margin”.
In other words, a piece of the action. Or as defined by Longman, “a share of the money from a business activity”. Regardless, what are these fees? A Deutsche Bank prepared white paper, though specific to the NYSE, presents the following fee explanation:
- A base mailing fee for each beneficial owner account that is entitled to receive proxy materials.
- A supplemental fee for intermediaries or proxy service providers that coordinate proxy distribution for multiple nominees.
- An incentive fee, which applies when the need to mail paper copies of proxy materials has been eliminated. For example, by consolidating duplicative mailings or distributing materials electronically.
- A fee for obtaining a list of non-objecting beneficial owners of an issuer’s securities (NOBO list).
According to this report, the fee structure largely mimics Broadridge’s fees. Which according to the Fortune article are highly profitable. In the 2018 Investor Presentation, Broadridge acknowledges they “Distribute 90%+ of broker regulatory communications to 140M individual accounts”. I would consider that a sizable moat! The primary reason being their ProxyVote ™ application which is customizable across firms. Schwab clients see the Schwab logo, etc. I assume there is an API or backend interface between the competitors as AT&T’s proxy, who contracted with Computershare (their Transfer Agent) was received in my Schwab account to vote via Broadridge’s service as opposed to Computershare’s Envision tabulating system.
The procedure appears to be:
- Most – not all – engage the services of a proxy advisory firm
- Fees vary but the ones I reviewed ranged from $6,000 to $55,000
- An intermediary is retained (usually Broadridge) to distribute the material
- The intermediary also distributes fees to the brokers based on applicable schedules
Of the proxy advisory firms I identified, the lowest fee was Laurel Hill while the highest was Alliance Advisors. Georgeson (Computershare) didn’t break out the fees so perhaps theirs are a bundled package. Bank of America retained two firms. All were private companies except for Georgeson.
The one capturing my attention was Alliance Advisors used by Legacy Texas (LTXB) with the highest fee. Their fee was even greater than Bank of America’s with significantly fewer shares outstanding. So I believe a call is on the agenda this week to identify if further services were rendered or if they are allowing themselves to be gouged.
I believe this is an accurate depiction of an underlying process that touches each and every one of us. At least it was an interesting diversion over the weekend!