If you’re a stockholder, you may have received proxy ballots in the mail or via email from your online broker. If you’re interested in influencing corporate governance at the companies you own a stake in, then learning the ins and outs of proxy voting is critical.

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 Walmart, for example, care about the votes from a shareholder with a measly 100 shares? 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. Here’s what else you should know about proxy voting.

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 is one of the most important SEC filings for investors to read, as it 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 executives. There are also proposals from management as well as shareholder proposals.

Also included in the mailing or email 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 or votes online or by phone.

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 McDougall, a director at BlackRock Investment Stewardship.

Shareholder proposals: What they are and how they work

Shareholder proposals involve shareholders trying to get something changed at the company they partially own. They might ask for additional disclosures around a certain topic, or they might be looking for a new policy to be implemented. Shareholder initiatives span many different environmental, social or governance (ESG) issues.

“It really is the primary means by which shareholders can influence a company’s operations and ESG responsibilities and practices,” says Alya Kayal, founder of ImpactARC, a consultant on ESG investment issues.

For instance, in 2011, the shareholder advocacy group As You Sow introduced a shareholder proposal that asked McDonald’s to “consider strong environmental policies for its beverage containers,” according to the group’s website. After a 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.

Of course, not all shareholder proposals make the cut, even those made by well-known investors. In 2022, famed investor Carl Icahn proposed two nominees to McDonald’s board in an effort to change the way the company’s suppliers treat pigs. Icahn owned shares worth about $50,000 and the nominees were not elected, receiving about 1 percent of the vote. He later dropped a similar campaign at Kroger.

To be eligible to submit a shareholder proposal, the following requirements must be met:

You must have continuously held:

  • At least $2,000 of the company’s voting stock for at least three years; or
  • At least $15,000 of the company’s voting stock for at least two years; or
  • At least $25,000 of the company’s voting stock for at least one year.

You also must agree to hold the required amount of stock through the company’s shareholder meeting and must be available to meet with the company regarding your proposal.

How successful are shareholder resolutions?

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, 5 percent the first year, is enough to refile the resolution the following year. In the second year, shareholder proposals must get 15 percent to be refiled the next year and in the following year must get 25 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 blog.

“There are a lot of companies that do great things, but they need improvement here and there,” he says.

Traditionally, few retail shareholders voted their proxy statement, but there are signs that may be changing with younger generations, according to a 2021 survey by Broadridge Financial Solutions, a provider of investor communications and proxy processing services. Out of investors with two years’ experience or less, 39 percent said they definitely planned to vote their proxy in 2021, the survey found.

What happens when shareholders vote against management?

Sometimes corporations may not like what their shareholders have to say, and they may not want to be caught off guard. In 2018, a majority of Disney shareholders voted against the company’s executive pay plan, though the advisory vote was non-binding. The company said it would take the vote under consideration when determining future executive compensation. But in 2020, nearly half of shareholders again voted against Disney’s pay plan after then-CEO Bob Iger was awarded $47.5 million for fiscal year 2019.

“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, senior ESG advisor at Boston Trust Walden 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,” McDougall 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.

Shareholder compromises with management

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.

Proxy voting resources

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.

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.

Two large proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, also play a major role in proxy voting. These firms are relied on by many institutional investors to help decide how to vote the proxies in hundreds or thousands of different investments. Their recommendations carry enormous weight and give them a lot of power in the corporate governance world.

Bottom line

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. Take time to read a company’s proxy statement and consider whether proposals are in the best interest of stakeholders. That can help lead to better investment returns for everyone.