Jim Crow "Protections" for Retail Shareowners

A strange revolution, or perhaps a counter-revolution against management excesses, is under way, a quiet and orderly one of small capitalists, determined to win democracy and fair treatment from the tycoons they pay to manage American business. — Lewis D. Gilbert, Dividends and Democracy, 1956

John Chevedden sent me an e-mail over the weekend, attaching two examples of the prejudice shown by on-line voting using a voter information form (VIF) from Prudential. The fact that the example is from Prudential is immaterial… it could be from just about any company in the US. The current system of VIFs that go out to retail investors not only makes me wonder if the revolution that Gilbert spoke of ever occurred, it also hearkens back to days when women could only influence their vote through men, blacks had to take a literacy test or pay a poll tax and earlier, when voting was restricted to men of property. From Chevedden’s e-mail:

• By pushing one button a shareowner can vote as recommended by management. A fair ballot would also allow a shareowner to push one button to vote against management’s recommendations.

• The ballot adds language to the shareowner’s proposal that only “if properly presented at the meeting” will the vote count. However, the same provision applies to management proposals and the VIF provides no such warning. By including the language only on shareowner proposals, the VIF tells the voter that he or she is potentially wasting their vote because there is the likelihood that all votes on the shareowner proposal will be thrown out if the shareowner fails to have the proposal presented.  It is another way saying that the proponent is irresponsible because of the likelihood they will fail to present their proposal.

Of course, I’ve already enumerated several other defaults in the VIF system.

• Actual proxies must include a bold-face warning if blank votes will be turned into votes for management. VIFs typically include a practically microscopic footnote. Then after you cast your preliminary vote, it is easier to see how your blanks will be voted; see this example at Mattel. Of course, if you do notice how your blanks have changed and you try to go back to fill in the blanks, you are punished because the system then requires you to vote all over again. The votes you want to remain valid have all disappeared.
• Actual proxy ballot titles have to clear and impartial. VIFs, are apparently drafted by management and might be edited by Broadridge without any requirement that they be either clear or impartial.
• Actual proxy ballot titles have to actually state the nature of the item being voted. VIFs can simply refer retail investors back to the actual text, buried in a different document, the proxy.
• While each failure of VIFs to meet the legal requirements of proxies acts as an impediment to fair voting, the combination of factors has a multiplicative, rather than additive effect. For example, if the VIF includes no summary but merely refers the retail shareowner to the proxy, shareowners are less likely to bother voting that item. If they see the warning that their vote may not count, because the item many not be presented at the meeting, they are again less likely to vote that item. If they don’t vote the item, their blank vote will be changed to a vote in favor of management’s recommendation.

Why are most votes cast using proxies that have to meet various legal requirements to ensure fair elections but when it comes to retail shareowners, the SEC appears to be unconcerned with issues such as clarity and fairness?

Most retail shareowners are not sophisticated investors. Laws require that the majority of investors in a hedge fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge.

I don’t always agree that small investors should be discriminated against, denied the ability to invest in  hedge funds. However, at least I understand the logic of protecting the “little guy” against potentially unrecoverable risk. Someone thinks it is for their own good.

Yet, as much as I try, I can’t understand how it can possibly be in the best interest of retail shareowners that VIFs don’t have to meet the legal requirements of actual proxies. Voting with a VIF feels a little too much like landowners “consulting” with their peasants, slaves or wives and then casting ballots “on their behalf.” Is it “for our own good?”

I previously discussed specific cases when I filed a petition with the SEC last year to stop blank votes from turning into votes for management and when I posted Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration. See also “Corrected” Ballot at Altrea Tips Votes to Management.

Where is the Wall Street Journal, New York Times, Huffington Post or even the Motley Fool on this issue? There must be more people concerned with Jim Crow laws for retail shareowners.  VIFs and legal proxies are not equal. I urge readers to bring this discrimination to the attention of the SEC’s Investor Advisory Committee through use of their online comment form and to Chairman Mary Schapiro via e-mail.