Promoting Equality in Corporate Transparency

In recent years, various entities such as government agencies, institutional investors, and proxy advisory firms have been advocating for enhanced corporate transparency in public filings. The goal is to foster trust and enhance corporate governance. However, the current system is characterized by an imbalance, as not all shareholders are required to adhere to the same standards of transparency.

Unlike registered shareholders, who own shares directly with a public company, beneficial owners, known as street name shareholders, hold their shares indirectly through a brokerage firm or financial intermediary. These intermediaries serve as the point of contact for beneficial owners in receiving proxy materials. Under the existing shareholder communication framework introduced by the Securities and Exchange Commission in the mid-1980s, beneficial owners fall into two categories: objecting beneficial owners (OBOs) and non-objecting beneficial owners (NOBOs). OBOs are beneficial owners who prefer not to disclose their name, address, and share positions to the company’s management, unlike NOBOs who have no objection to such information being shared.

Many OBO accounts consist of high net-worth individuals, hedge funds, and foreign investors who conceal their identity and share positions from management. This ability to obscure their identity and ownership provides them with an outdated and unfair advantage, contrary to the current demands for greater transparency and open communication from boards and management teams. This creates unnecessary costs and disruptions for management working to drive business performance for the benefit of all stakeholders.

Moreover, the OBO/NOBO classification places an unjust burden on registered owners and those beneficial owners who do disclose their information. For companies to pass critical proposals and manage day-to-day operations, they require voting support from shareholders. The presence of an unidentified shareholder segment with a significant share position can significantly impact the outcome of a shareholder meeting, leading to chaos.

The existing SEC shareholder communication framework also disproportionately affects smaller companies. Small businesses often bear the brunt of the costs associated with shareholder outreach campaigns. Retail investors, who predominantly own shares in smaller firms, are less likely to participate in corporate elections compared to institutional investors. Additionally, the current system allows any shareholder, including government-sanctioned entities and hostile foreign entities, to conceal their ownership behind an OBO registration.

The 2021 Corporate Transparency Act (CTA) was passed by Congress to combat illicit activities such as tax fraud, money laundering, and financing terrorism by requiring U.S. private corporations, LLCs, and S businesses to submit Beneficial Ownership Information Reports to FinCEN. Despite these stringent regulations, the largest publicly traded companies in the world are still in the dark about their actual owners.

At Alliance Advisors, we have seen firsthand the challenges public companies face in securing votes for shareholder meetings due to the OBO issue. To address this problem, we established the Shareholder Ownership Transparency Alliance (SOTA) to advocate for the elimination of the OBO classification. Doing away with the OBO designation is a practical solution to an outdated regulation that benefits both companies and shareholders by facilitating lower costs and more efficient communication channels.

Eliminating the OBO classification would create a more transparent environment for all stakeholders involved in the corporate landscape. It is crucial for policymakers in Washington to level the playing field and ensure that regulations promoting transparency apply uniformly across all companies.