U.S. companies using online proxies and mailed notices--also known as “notice and access”--continue to see sharp declines in voting by individual investors, but some shareholder advocates are re-examining their previously pessimistic views on e-proxy.

Since July, when firms could begin electronic distribution of their proxy materials, 92 companies have held annual meetings, according to Broadridge Financial, which processes proxy votes for most of the issuers that have adopted notice and access. At those 92 firms, retail shareholder participation dropped more than 75 percent from the previous year. Only 4.5 percent of individual investors voted at e-proxy firms in late 2007 and early 2008, down from 19.2 percent participation in late 2006 and early 2007, according to Broadridge.

According the latest statistics from Broadridge, 283 public companies adopted electronic proxy material delivery as of March 31. In July 2007, the Securities and Exchange Commission adopted a rule allowing public firms an alternative to sending full packets of proxy materials to each shareholder--the “notice and access” model--whereby issuers would mail a notice to shareholders telling them that proxy materials are available via a Web site other than the SEC’s EDGAR site. By January, large companies were required to post proxy materials online, though they could still choose to send full packets of voting materials in advance of their annual meetings. Small companies will have until 2009 to post proxy information online.

The possibility of a drop in retail shareholder participation was raised by many of the investors who commented on the SEC’s notice and access rule. During the first comment period in 2006, shareholders Nick and Emil Rossi warned in a letter to the SEC that electronic proxy delivery “is another attempt to disenfranchise small individual shareholders.” A survey conducted by Forrester Research--on behalf of Broadridge and included in the proxy processing company’s comments to the SEC--indicated that 38 percent of shareholders who vote would be less likely to look at proxy materials online and less likely to vote under a notice and access model.

At the time, investor groups expressed concern that older or less technologically savvy shareholders would be reluctant to use the computer technology required to view e-proxies. The Association of BellTel Retirees wrote in its letter that it was “premature” of the SEC to expect that retirees and other shareholders over the age of 65 are comfortable enough with the Internet to access corporate proxy disclosures.

The initial decline in retail voting appears to bear out these warnings. But the dip may be temporary, some advocates say. Richard Clayton, research director for the CtW Investment Group, told Risk & Governance Weekly that a number of factors could be contributing to the drop in retail participation--including frustration with a flagging economy and a declining real estate market. Trouble using the new online proxy voting applications could contribute to a temporary drop in participation, as well. “With a lot of online services, there tends to be a learning curve,” Clayton said.

Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County, and Municipal Employees, agreed. Ferlauto told R&GW that it would probably take at least five years for some retail shareholders to become familiar with the technology, have the broadband network access necessary to download large files, and cope with the hassle and expense of printing out long proxy forms. “These are significant barriers that will be overcome with time,” Ferlauto said.

Ferlauto also noted that notice and access may have dampened support levels for “say and pay” and other shareholder proposals this year. However, CtW’s Richard Clayton told R&GW that because it’s difficult to measure how many retail investors are voting for shareholder resolutions, it’s too early to tell whether the e-proxy rules are having a real effect on proposal support.

A number of early-adopter companies reported shareholder complaints over the mailed notice cards. A few shareholders wrote their votes on the notice cards and sent those back to the company, Gail Smith, director of corporate development for pharmaceutical firm Pharmos, said in a January interview on e-proxies with Broadridge.

Dominic Jones, editor of the IR Web Report, wrote about problems he had accessing online proxy materials for Applied Micro Circuits in July of last year. Mistyping the Web address for Broadridge’s proxy voting site, Investor E-Connect, brought up a “spam” advertising site he suspected preyed on people who accidentally visited the wrong Web page, Jones wrote. Other investors complained about the mailed notice that Broadridge used to alert shareholders to online availability. The notice form was too small and not very “user-friendly,” Helen Kaminski, assistant general counsel for food company Sara Lee told Broadridge.

Broadridge has no plans now to redesign its mailed notice, Chuck Callan, the company’s senior vice president of regulatory affairs, told Risk & Governance Weekly. This is partly because the SEC requires that certain text be printed on the notice of online proxy material availability. “You get the notice, but it’s not in and of itself a ballot,” Callan said.

He contends that the new, unfamiliar proxy delivery method is causing retail shareholder participation to drop. According to Broadridge statistics, in cases in which e-proxy companies sent certain shareholders a “full set” of proxy materials, and among the 0.5 percent of shareholders who “opted in” for full paper copies, voting was much higher. For retail shareholders receiving the full set of proxy materials this year, the voting rate was approximately 66.5 percent. “The basic conclusion is that opt-in rates are low, opt-out rates are low, and if there is a change in the default, people tend to take no action,” Callan told R&GW.

Two new initiatives may also help individual investors become more informed about governance matters and vote their shares. A new Web site, ProxyDemocracy.org allows shareholders to see how institutional investors plan to vote at upcoming meetings. The California Public Employees’ Retirement System, Calvert Funds, Christian Brothers Investment Services, and Domini Social Investments are among the investors that have signed up to make their vote recommendations available on the site. Investors can also assign their voting rights to a third party, such as an environmental or social group, through the Investor Suffrage Movement. The proxy exchange, currently in trial phase, will help members transfer ballot rights to other members online.