This is Part 3 of a post which started out reviewing the important thesis outlined in The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights by Ronald J. Gilson and Jeffrey N. Gordon (January 1, 2013) in Agency Capitalism: Corrective Measures (Part 1). In this post and in Agency Capitalism: Corrective Measures (Part 2) I hope to extend the work of Gilson and Gordon by offering additional avenues to counterbalance the central problem of devalued governance rights. Unlike the passengers on Lily Furedi’s subway, we don’t have sit or vote in relative isolation.
Encourage Independent & Robust Client Directed Voting Platforms
Historically, most retail shareowners toss their proxies. They don’t know the director candidates or the issues and they don’t subscribe to services such as ISS or Glass Lewis for proxy voting advice. During the first year under the “notice and access” method for Internet delivery of proxy materials, less than 6% voted. This contrasts with almost all institutional investors voting, since they have a fiduciary duty to do so.
“Client directed voting” (CDV), a term coined by Stephen Norman, is seen by many as a solution for getting more retail shareowners to vote, ensuring companies get a quorum, and helping management recapture a good portion of the broker-votes cast in their favor that evaporated with recent reforms. (see New Model for Director Elections: Client Directed Voting, 2006… scroll down the page) Norman’s proposal was seen by many as an extension of the “Vote with the Board’s Recommendations” button recently banned from VIFs. An open form of CDV could result in similar impacts but would create much more thoughtful and robust corporate elections.
The key issue in any open CDV system is to let shareowners control where their electronic ballots are delivered. Just as there is no question shareowners can control where hardcopy ballots are delivered, there should be no question they can direct where their electronic ballots are delivered. This simple requirement would insure third-party content providers an opportunity to compete and improve the quality of voting advice.
Additional elements for a more effective CDV system include:
- A wide range of voting opinion sources that will eventually cover all issues;
- Open access for any new opinion sources to publish their opinions;
- Open access for shareowners to choose any opinion source for our standing instructions on voting;
- Sufficient funding for professional voting opinion sources that compete for funding allocated by retail shareowner vote (or by beneficial owners of funds that may choose to “pass through” their votes).
Under an open system for of CDV, feeds will offer the ability for retail shareowners to essentially build a “voting policy,” just as institutional voters are now able to do. That model will increase participation and voting quality. We shouldn’t ask shareowners to affirm every single pre-filled ballot. That could be a deal breaker for people with stock in many different companies who would rather spend their time on other activities.
Third-party CDV systems, like the former Moxy Vote, could allow investors to create hierarchies of voting instructions. (Vote like X. If X hasn’t voted the item, vote per Y. If Y hasn’t voted, vote per Z, etc. Eventually, these systems could become very complex. Vote like X on issue A; vote like Y on issue B, also specifying defaults if either X or Y don’t have votes recorded.) See Client Directed Voting Q&A on the VoterMedia.org site.
If brokers are required to deliver proxies as directed by their clients, another whole model could emerge around “proxy assignments.” Proxies assigned to organizations or individuals, for example, could give annual meetings a new meaning. See Investor Suffrage Movement by Glyn A. Holton.