Frank G. Zarb, Jr., a Partner at Katten Muchin Rosenman LLP, and John Endean, President of the American Business Conference, raise an important topic in a recent post to the HLS Forum on Corporate Governance and Financial Regulation (Restoring Balance in Proxy Voting: The Case For “Client Directed Voting,” 1/14/2010). Unfortunately, their solution would likely lead us essentially back to a restoration of “balance” through what amounts to “broker voting.” Mark Latham’s proposal for “Feed-based Automated Vote Emulation” (FAVE, see Investor Education On Proxy Voting, VoterMedia Finance Blog, 1/29/2010) based on the concept of Proxy Voting Brand Competition offers more promise. Let’s take the best elements from both proposals.
As Zarb and Endean point out, “the voting rate among individual investors hovers at the 20% level. Companies that mail their investors a notice that the materials are available on the internet – in lieu of mailing the all materials in paper – have seen even lower voting levels in the 5% range.” They attribute the low turnout to “busy lives” and likelihood that “reviewing and completing multiple voting forms along with related materials is not a center ring concern.”
As Latham puts it:
It’s not that we retail investors lack intelligence. We lack the time and expertise to analyze proxy voting issues – board elections, executive compensation, mergers etc. We lack the economic incentive to spend the time and to gain or buy the expertise. So those who do vote tend to follow the board’s recommendations – the only professional advice conveniently available.
By contrast, institutional investors are much better organized to use specialized professionals for voting decisions.
Most people realize there’s no point in casting uninformed votes just for the sake of voting. That plus the difficulty of becoming informed are key reasons why many do not vote.
Under CDV, a shareowner could provide their broker with advance standing instructions for the voting on specific types of proposals “that are sufficiently clear that the broker would not have to interpret standing instructions when applying them to the proposal. An example is a company or shareholder proposal to de-stagger the board of directors.” The voter instruction form provided to each shareowner would be tailored to them, indicating which proposals are the subject of standing instructions and providing them with a means to over-ride their previous instructions.
I like this aspect of the Zarb and Endean proposal on CDV. Unfortunately, very few shareowners would be willing to sit down and fill out a questionnaire that lists typical shareowner resolutions, hopefully also explaining the pros and cons of each. If they were willing to do that, they’d probably be voting already. The most effective way to educate shareowners on these issues would be to expose them to the policies developed by institutional investors and encourage them to compare policies as a whole and/or as applied to specific votes.
Many shareowners could eventually be encouraged to undertake such exercises. However, it is mostly likely to be a gradual process. Education will mostly likely come one issue or one company at a time. Most shareowners faced with such a questionnaire would probably ask for other options. The default offered by Zarb and Endean’s CDV proposal consists of choosing one of the following options to ba applied to all votes:
- in proportion to other retail shareholders;
- in a manner consistent with the board’s recommendation; or
- in a manner that is contrary to the board’s recommendation.
If a participant did not choose one of these default elections, no vote would be recorded on matters with respect to which the shareholder has not otherwise affirmatively cast a vote.
I call option 3 the “bomb throwing option.” Why would individual own a stock and provide instruction to always vote against the board’s recommendation? That makes no sense, especially when applied to a whole portfolio. Option 1 allows your vote to count toward forming a quorum but would otherwise have no effect. Marking none of the three options would deny your vote to the quorum. Neither would appear rational on a predetermined basis for an entire portfolio. That leaves option 2, which would have an effect very similar to broker voting. We can do better than blind trust in all the boards of all the companies in our portfolio on every issue. Think of giving such a blank slate to a politician.
In contrast, Latham’s proposal would rely on “proxy voting feeds,” similar to blog RSS feeds, that would have a standardized format for transmitting and receiving proxy voting decisions. “Anyone could publish a feed, and anyone could subscribe to any published feed. You would instruct your broker to vote your shares according to the decisions in your chosen feed. You could change your choice of feed at any time, and manually override any specific voting decision.”
These feeds, for example, could be provided directly by institutional investors, public interest groups and others. I could set up my feeds to vote with the Domini Funds, if they own the stock and announce their vote in advance. If Domini doesn’t vote, vote like Florida SBA. If neither vote, vote like CalPERS, then CalSTRS, TIAA-CREF, etc.
More likely than direct feeds from individual institutional investors or advocates, initial feeds would probably come from aggregators like ProxyDemocracy.org, MoxyVote.com, or TransparentDemocracy.org. I’d like to see a system that allows me to set defaults by resolution type AND by the voting practices of trusted brands. Let’s give shareowners real options… and options that will eventually encourage them to obtain an education by conducting their own comparisons, whether of proxy voting policies or the basis for brand reputation. Latham’s paper also offers some reforms that will help us to get from here to there, like “data-tagging (e.g. XBRL) of proxy and vote filings, to facilitate creating public databases.”
I’d like to see further discussion of such proposal and exploration of all options. The Corporate Library Blog provided a good start with the following: “I’d like this if it also offered investors the opportunity to have their proxies voted according to the recommendations of independent sources like RiskMetrics or according to the guidelines of groups like the Council of Institutional Investors, the Shareholders Education Network, or the organizations participating in Moxy Vote.” (“Client Directed” Voting, 2/14/10)
The Commission should pass a rule that states that a shareholder has full control to request that a proxy ballot or VIF be delivered electronically to the voting platform of his or her choice (e.g., as one may select a physical address or an e-mail address). Such a rule would compel participants to “plug in” to electronic voting platforms that are being developed. Consequently, distributors and tabulators would quickly realize that a central dissemination and collection point may provide a nice solution to the inefficiency of attempting to build an interface with each platform separately. Or, in lieu of a central source, such a rule would encourage the development of standardized file formats and procedures for electronic voting that would expedite progress.
A January 20 Moxy Vote Blog, Want better governance? Here is your silver bullet, raises a final important point, conflicts of interest.
It is of even greater importance for regulators to ensure that a shareholder has full control over the delivery of his/her proxy ballot because there are conflicts of interest among industry participants that could derail the development of electronic voting platforms. The distribution agents in the industry work for the issuers (either directly or, indirectly, as is the case with broker-held shares). As such, the agents have the incentive to satisfy these paying customers rather than do what is best for corporate governance. By giving delivery control to the shareholder, we’d create a proper check and balance on the proxy distribution agents that otherwise may not have incentive to engage with all retail-friendly electronic platforms.
Client Directed Voting, as outlined by Zarb and Endean, has some very good elements… like the ability of creating “default” proxy voting policies, much like those used by institutional shareowners. However, it falls short in failing to recognize the potential conflicts of interest outlined in the above cited Moxy Vote Blog post. “The distribution agents in the industry work for the issuers (either directly or, indirectly, as is the case with broker-held shares). As such, the agents have the incentive to satisfy these paying customers rather than do what is best for corporate governance” or what is best for the individual shareowner. Delivery and feed subscription control must go to the shareowner.