Proxy season is in full swing. You’ve likely been receiving ballots in the mail. If you’re at all interested in influencing corporate governance, then learn the ins and outs of proxy voting before your company’s meeting.
For small-time owners of common stock in companies, it can be easy to discount the importance of participating in corporate governance. Why should management at Exxon Mobil Corp. care about the votes from a shareholder with a measly 100 shares, for instance? But adding your voice to those of other shareholders, big and small, can get attention and influence the decisions of the board of directors, the management and the social and environmental direction of the company.
What is a proxy? Why do you vote it?
Before the annual shareholder meeting, packets of information containing the proxy statement are sent to all shareholders. The proxy statement contains information about the topics to be covered at the annual meeting, including nominations for the board of directors and the pay packages of the top five executives. There are also proposals from management as well as shareholder proposals.
Also included in the mailing is background information on the issues.
The shareholder then fills out the proxy ballot, also known as a voting instruction form, and sends it back.
Alternatively, shareholders can vote by phone or over the Internet.
The various issues up for a vote every year receive different treatment from management. For instance, while the votes for directors on the board are binding, the say on pay vote and those on shareholder resolutions are considered advisory.
For the advisory votes, “there’s nothing legally binding where the company has to make a change. But even if there are just 20 percent of shareholders who voted in favor of a certain initiative, that’s a lot. When a portion of your shareholders get together in support of an issue, that warrants discussion at least,” says Jessica Clarke, a client relationship consultant for individual advisory services at TIAA-CREF.
Anyone who owns $2,000 worth of a company’s stock for one year can submit shareholder resolutions to be voted on at the shareholder meeting. Shareholder initiatives span many different environmental, social or governance issues.
“It really is the primary means by which shareholders can influence a company’s operations and ESG responsibilities and practices,” says Alya Kayal, deputy director of policy and programs at US SIF: The Forum for Sustainable and Responsible Investment.
ESG stands for environmental, social and governance.
For instance, in 2011, the shareholder advocacy group As You Sow introduced a shareholder proposal that McDonald’s Corp. “consider strong environmental policies for its beverage containers,” according to the group’s website. After a very strong vote with 29.3 percent of shareholders voting for the proposal, McDonald’s launched a test program in some stores, substituting paper for foam cups. In 2013, McDonald’s announced it would replace all polystyrene beverage cups with paper cups at 14,000 U.S. restaurants, As You Sow reported.
Are shareholder resolutions worthwhile?
Shareholder resolutions don’t typically garner majority votes. The biggest stakeholders in publicly traded companies are generally institutions such as pension funds or mutual funds, and they typically vote with company management. But just getting some votes, 3 percent the first year, is enough to refile the resolution the following year. In the second year, shareholder proposals must get 6 percent to be refiled the next year and in the following year must get 10 percent.
“There’s the myth that if people don’t vote with management, they should just sell the stock. It’s like saying, if you drive through town and think there needs to be a stop sign at an intersection, you should move to another community,” says James McRitchie, a shareholder rights advocate and publisher of CorpGov.net, a corporate governance portal and blog.
“There are a lot of companies that do great things, but they need improvement here and there,” he says.
Unfortunately, not even half of outstanding shares held by retail investors are actually voted, according to Broadridge Financial Solutions, a provider of investor communications and proxy processing services.
For the fiscal year 2013, which ended June 30, 30 percent of shares held by retail investors were voted, but just 13 percent of retail shareholders cast a vote, according to research by Broadridge.
Unwelcome news to management
Sometimes corporations may not like what their shareholders have to say, and they may not want to be caught off guard. In 2012, Citigroup shareholders roundly rejected the proposed executive pay packages, which came as a surprise.
In 2014, two proxy advisory firms suggested that shareholders vote against Citigroup pay packages. The recommendations were based on the rejection of Citigroup’s capital plans by the Federal Reserve, The Wall Street Journal reported in April . Nonetheless, shareholders voted to support the executive pay plan in the April 22 annual meeting, Reuters reported.
“Obviously if you propose something as management and shareholders vote it down, it’s dramatic and significant. And you can’t ignore it. You’d be rather foolish to ignore the message your share owners are sending you,” says Timothy Smith, director of ESG shareowner engagement at Walden Asset Management in Boston.
Similarly, corporate management types take shareholder initiatives seriously. They may not always be interested in instituting the changes, but “companies are definitely willing to sit down and discuss it — especially with their larger institutional clients,” Clarke says.
Usually if shareholder resolutions collect 10 percent or 20 percent of votes in favor, it’s enough to be addressed by the company management.
Best option: Everybody agrees
On the other hand, sometimes shareholder resolutions don’t even make it to a vote.
“The more dramatic example is when shareholders sponsor a resolution and a company says either, ‘I think this is going to pass’ or ‘I don’t want to have this debated at the shareholders meeting.’ Or maybe, ‘We agree with most of the issues.’ Then management would say, ‘We’re willing to make a proposal for change if you withdraw the resolution,'” says Smith.
“And the specter or the possibility of an actual vote at the shareholder meeting prompts change,” he says.
For instance, in 2014, As You Sow, with Arjuna Capital, submitted a shareholder resolution to Exxon Mobil requesting a report on the risks climate change poses to the company. Exxon agreed to publish a Carbon Asset Risk report and the shareholder resolution was withdrawn without being voted on by shareholders.
” The report will provide investors with greater transparency into how Exxon Mobil is planning for a future where market forces and climate regulation make at least some portion of its carbon reserves unburnable,” according to the press release on the As You Sow website.
Why proxy voting matters
Like most investment mailings, proxy voting materials tend to be complex and a little esoteric. In most cases, the nominations for the board of directors are not particularly well-known people, and the other issues up for a vote can also require some research.
“It’s not something you would take on vacation to read,” Kayal says. “Nevertheless, it is an important document to go through. There are organizations that can assist you.”
Investors can go online to learn about the issues and see how advocacy groups, mutual funds or pension funds have voted. The website ProxyDemocracy.org gives retail investors some context in which to evaluate their proxy statements, which might make it a little harder to toss and forget about.
Ceres.org follows sustainability-related shareholder resolutions, and the website for As You Sow lists the resolutions the group filed for the year.
Mutual fund investors can find out how their funds voted by going to the fund family’s website and looking for their proxy voting guidelines. If you disagree with their voting policies, “then you can write to them and discuss how they should be changed,” McRitchie says.
“Where you would have more clout, if you have a 401(k) plan or if you’re a public employee, then you can go to your employer and say, ‘Hey, I noticed that this fund is voting this way — can we ask them to change?'” he says.
If a few other employees make the same request, it can start to make a difference because institutional investors don’t want to lose business.
As shareholders of common stock in publicly traded companies, investors have a right and a responsibility to pay attention to how the company is run and suggest ways it could be better. That can lead to better returns for everyone.