Opinion: Four Tips for Conducting a Proxy Campaign

Obtaining a quorum and passing proposals in mutual fund proxy campaigns can be challenging for mutual fund firms. Funds don’t often conduct proxy campaigns – usually only once every three to five years – so many shareholders don’t know how to respond to a proxy vote request. Their uncertainty can lead to slow response times or a failure to participate, which ultimately raises the price of the fund. Low participation demands more reminder letters, emails and phone calls – all expenses shareholders eventually bear.

Nearly all mutual fund proxies are triggered by director elections; those that are not are prompted by merger-and-acquisition activity, fund reorganizations or changes to investment fundamentals. Mutual fund directors aren’t always directly involved in all the ins and outs of a proxy campaign but are usually informed of the campaign approach and costs and can influence decision making. Therefore, it’s important to have a sense of the best practices to get shareholders to respond to vote requests – so funds can conduct a successful and cost-effective proxy campaign.

Create Strong Communication

Boards need to ensure that the right communication plan is in place. The proper strategy could depend on where shares reside. Consider whether they are held directly by the fund, by a non-objecting or objecting beneficial owner, or in an omnibus account. Directors need to determine if the proxy distribution firm will allow contact directly with shareholders or if the firm’s back office will assist in getting the word out about the campaign. Think about how the funds are distributed – whether they are direct, only through a few firms or widely distributed in all channels – and who the shareholders are. A plan of action with the right vehicles is critical for each type of shareholder.

The nature of proxy communications has evolved significantly in the past few years. Calling shareholders, a more traditional approach, represents an average of 15% to 20% of votes, but this method is the most expensive and has proven to be increasingly ineffective because it’s difficult to reach shareholders by telephone.

Some mutual funds allow shareholders to vote through their smartphones, a less expensive method. In fact, smartphone voting resulted in reaching 30% of shareholders who historically never voted before, according to data from Broadridge. In some cases, shareholders are alerted to a proxy campaign through an email and are directed to a mobile-friendly site, where they can vote directly via their smartphones. Other low-tech ways to get shareholders to vote include postcards alerting them to the upcoming proxy, additional proportionate voting for IRA accounts, institutional voting, house holding and consolidated ballots.

Keep It Short and Sweet

Before the board approves the proxy, prioritize what is included. Because these campaigns happen so infrequently, fund firms often include multiple proposals in their proxies. Sometimes firms hold certain non-urgent proxy proposals until an event demands that a proxy take place. For example, if a proxy campaign is launched because of a director election, the firm may add on requests to approve a subadviser, portfolio investment changes or fee increases.

Increasing the number of proposals per proxy saves money but it also can increase the difficulty of getting any of the proposals passed. Making reminder phone calls or sending additional mailings can add to the overall cost of the proxy. The more complex the proxy proposals, the slower the responses.

Find Hidden Shareholders

It is increasingly difficult to make contact with shareholders who are otherwise anonymous because of omnibus accounts or their designation as objecting beneficial owners. New approaches and techniques need to be considered to connect with shareholders. The fund’s back office must work with the firm to strengthen these relationships. For example, the board can facilitate an agreement from omnibus firms to allow proxy providers to reach out to their underlying shareholders. To do this, strong relationships are required between the firm and its distribution partners, as well as between the vendor and partners or omnibus firms.

Think Ahead

How a proxy is planned can make or break a proxy campaign – and its budget. Proxy campaigns include many moving parts: contact strategies, proxy document language, the mix of items shareholders are voting on, delivery channels, and packaging and mailing strategies. Advanced planning has a direct effect on the outcome of a proxy vote campaign. Make sure the proxy vendor’s plan touches every possible communication channel as effectively as possible, from as early in the campaign as possible.

Make sure the cost effectiveness is reviewed. The cheapest solution isn’t always the most effective and in the end could cost more to achieve quorum and proposal passage. The right strategy can save your firm money by executing a communication plan that is well thought out, including delaying outbound calling until mailings have arrived. Getting it right the first time and reducing the need for follow-up outreach reduces costs and is more customer-friendly for shareholders.

The board should be aware of the process and its cost implications. Review the materials, timelines and recommendations carefully. The success of the proxy within specified time limits and budget depends on these functions being the best available. A bad plan results in a bad result. It is as simple – and as complex – as that.