December 10, 2018
Last month’s U.S. Securities and Exchange Commission (SEC) roundtable on the proxy process highlighted key issues encountered by the different participants of the shareholder voting process. To better understand these issues, it is worth taking a step back to review the purpose of shareholder voting and the mechanics of how it currently works. It is critical for retail investors to appreciate how the voting designation process works, considering that most investors delegate voting to the fund managers of their 401(k)s or pension plans.
A shareholder is anyone who directly owns common stock in a publicly traded company. Because they are the common owners of the company, shareholders have the ability to submit proposals and the right to vote on certain corporate matters. That being said, they understandably have an interest in conducting oversight over the company’s management and board of directors to ensure the company’s governance is optimal for long-term value creation.
Votes are sometimes allocated as one vote per share and sometimes one vote per shareholder, with the former giving those with more equity more influence in a shareholder vote. Here are a few examples of matters that may be addressed in shareholder proposals:
- Board of director elections;
- Proposed operational alterations;
- Shifts in the company’s objectives;
- Major structural changes to the company;
- Executive compensation; and,
- Anything that would directly impact stock holdings (e.g., a merger or stock split).
However, there are significant limits on what shareholders may submit as proposals, as they can only vote on major issues that impact a company and not operational and administrative matters overseen by the board of directors. As such, companies can ask the SEC to exclude certain proposals on the basis that the proposal is not economically significant to the company, that a proposal would constitute micromanagement of the company, or proposals that have been already been submitted a certain number of times within a specific time period, as well as other matters considered inappropriate for shareholders.
These votes most commonly take place at an annual shareholder meeting, often referred to as an AGM. On occasion, special meetings are convened to hold shareholder votes on pressing issues. When shareholders are invited to attend a meeting, they are also sent a proxy form which contains the actual voting ballot for a meeting, and gives the option to designate someone as their representative by proxy (someone who can vote on their behalf).
Proxy forms are where proxy advisory firms get their name. The firms were formed to advise investors on the matters at hand on these forms. To cast their votes, shareholders can attend the meeting or make their selections on the ballot included in the form and mail in their votes, much like an absentee ballot. A shareholder can also relinquish his or her votes to a third party.
Most retail investors are invested in public corporations through 401(k)s or pension plans to save for retirement. Therefore, retail investors’ voting responsibilities are often delegated to their fund managers. Fund managers are legally required to uphold a fiduciary duty to their clients by voting in a way that essentially maximizes the value of their clients’ investments, unless the client specifically opts into a fund that promotes environmental or socially responsible investments. Unfortunately, as the number of environmental and social proposals has grown and such proposals have become more mainstream, there is a larger grey area for fund managers to argue that they are voting in their clients’ best interests.
Concerns surrounding this issue are one reason why the Department of Labor issued guidance earlier this year that warned fund managers not to rely too heavily on environmental and social criteria, and instead to prioritize returns for their clients. It is also why it is important for retail investors to be familiar with the shareholder proposal process. If retail investors lack an understanding of the voting process, it could lead to fund managers making decisions on their behalf that could negatively impact their retirement savings.