Posting Begins for Proxy Plumbing Comments

The SEC has begun posting public comments regarding their Concept Release on the U.S. Proxy System. I will probably focus my own review on Part IV, section B. “Means to Facilitate Retail Investor Participation.” I sent in a set of initial comments dated 7/16/10, which focus on the need for an An Open Proposal for Client Directed Voting, basically a reprint from my post on the Harvard Law School Forum on Corporate Governance and Financial Regulation, Wednesday July 14, 2010.

By posting these comments early, my hope is that others who plan to comment on the Release will read my comments and will be swayed that an open form of what the SEC’s terms “Advance Voting Instructions” is preferable to a restricted form with just a few options. What I would like to avoid is a lot of comments similar to those of Frederick D. Lipman of Blank Rome LLP, who in an otherwise candid and intelligent email said,

I would love to be able to permanently direct my broker to just vote in favor of all management proposals, subject to my ability to revoke that instruction. I would also like the ability to permanently instruct the board of directors’ chosen proxy agents to vote in favor of all management proposals, subject to my ability to revoke that instruction.

While Lipman doesn’t say what his default voting for shareowners proposals should be, I can easily imagine he would have his broker vote against them all, since elsewhere in the email he expresses his concern that “a loud and active corporate governance constituency” could “hijack the shareholder approval process.”

This could occur, for example, if only 20% of the outstanding shares actually voted and they were able to secure the votes of 10.1% of the outstanding shares. In effect, we would be allowing the corporate governance constituency and other activist shareholders with a separate agenda to control the election of directors and other important issues affecting all investors in the company.

Lipman indicates that “If for some reason I decide that I do not like the company, I sell the stock and do not try to change the corporate governance structure. I believe that my attitude is similar to the attitude of most individual investors.”

He may be right concerning the attitude of most individual investors but I think that is simply because as Lipman admits, even though he is the lead author of Corporate Governance Best Practices: Strategies for Public, Private, and Not-for-Profit Organizations and Executive Compensation Best Practices (Wiley Best Practices), he does “not have enough economic interest in any of my investee companies to spend the time and effort to analyze their corporate governance situation.”

I don’t find reading proxies a cost effective use of my time either but I don’t subscribe to the idea that shareowners should sell their stock rather than try to “change the corporate governance structure.”

Yes, it can take a lot of effort to submit a shareowner proposal yourself or to run a proxy contest. Unless you hold a large stake in a company, it probably isn’t worth the expense to the individual investor. However, if someone else is undertaking those activities isn’t it worth some very small investment of time to evaluate whether or not they would be likely to improve an already pretty good company?

I urge those who may comment on Part IV, section B to first take a look at sites like and These sites are currently in an nascent stage, but they could eventually allow you to align your votes with an organization that reflects your values, even if those values are simply to make as much money as possible in the short-term.

Right now, those announcing their votes in advance are mostly SRI funds like Calvert and Domini or public funds like Florida SBA and the Ontario Teacher’s Pension Plan. As more funds see there is power in announcing their votes in advance because they sway additional proxies we can fully expect more traditional funds like Barclays Global Investors and Vanguard to also announce in advance.

These funds all have access to proxy monitoring services and spend considerable resources actually reading the proxies. Isn’t it preferable to align your votes with a shareowner that shares your values but independently evaluates management than it is to simply trust and vote with management?

I own BP stock but would have welcomed proposals that would have focused management attention more on risk after the Texas oil refinery explosion. Maybe that would have reduced the likelihood of the current Gulf spill. Even the best managers can often benefit from shareowner input. It seems to me they are more likely to get such input if we have an open process for advance voting instructions than one with very few options.

As I publish this post, I just received an email from Lipman’s iPhone: “I have no problem with expanding the choices.” I hope that sentiment is widely reflected in future comments to the SEC.

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