Yesterday, I posted a recent letter to the editor of Pensions & Investments praising their editorial, Winning Over Proxy Voters, which argues that institutional investors have a fiduciary duty to announce their proxy votes in advance of annual meetings, if doing so is likely to influence voters. If institutional investors heed their call, it will speed the development of open client director voting (CDV) and more intelligent proxy votes.
As corporate power grows and the power of government falls, mechanisms to govern corporations become more important. As government power falls, their power to regulate corporations falls as well. Further, as the influence of corporations over governments increases (e.g. lobbying) the will of governments to regulate corporations also falls. – CHR for Social Responsibility
Historically, most retail shareowners toss their proxies. During the first year under the “notice and access” method for Internet delivery of proxy materials, less than 6% made use of their proxy votes. Those that do vote own disproportionately more shares (about 25-30% of total retail shares). The voting rate hasn’t improved much, if at all. This contrasts with almost all institutional investors voting, since they have a fiduciary duty to do so. Unfortunately, it isn’t time/cost efficient to read through the entire proxy to vote a few retail shares intelligently.
Mark Latham has probably given this problem more thought than anyone and also provides the best advice. As far back as the year 2000, Latham’s The Internet Will Drive Corporate Monitoring, more recent Proxy Voting Brand Competition, and Client Directed Voting Q&A (available at the VoterMedia.org Publications page) proposed an open and competitive system, using a market-driven framework, empowering retail shareowners with better information and proxy voting tools. Contrast with the closed system proposed by Stephen Norman to recapture votes for incumbents lost when the NYSE filed a proposed rule change with the SEC to eliminate all broker voting defaulting to incumbents in the election of directors when retail shareowners failed to vote.
How CDV Would Change Proxy Votes
Open CDV enables retail shareowners to implement preselected voting policies, similar to how most institutional investors vote. Most fund managers do not read the proxy statement and understand the proposals in the context of a company’s particular circumstances. They have specialized staff for that review, some in-house, some out-sourced. Likewise, a few retail shareowners will read proxies, but most will not. Those who do not read them can increasingly be informed by those who do, through compilations of voting records and voting announcements posted on the Internet.
Anyone should be able to create a voting feed of such voting records, just as anyone can now create a blog. One way to create a feed is to remix other feeds, just as blogs often post or link to material from other blogs. A remixed feed can select different source feeds for different stocks or different industries or different categories of voting matters (director elections vs. shareowner proposals etc.). In his article The Internet Will Drive Corporate Monitoring, Latham termed these remixed feeds “meta-advisors.”
Engagement requires either a fiduciary obligation, which we do not have for retail shareowners, the perception of value in the process (which may take years to establish), or passion around relevant issues. Of the three, passion around relevant issues is the easiest to ignite.
Most third-party platforms or voting feeds will be designed around “issues,” rather than harder to understand policies and procedures. That will naturally appeal to a broader base of retail shareowners. More people will choose voting advice around policy concerns, like global climate change, than around procedural concerns, like whether or not the roles of board chair and CEO should be split.
A small but important percentage of retail shareowners will get more involved in helping to determine voting feed reputations. They will compare feed quality and issue/value identification by such means as creating focus lists at ProxyDemocracy.org. See, for example, this page.
There is already a healthy base of “brands” developing with Domini, Calvert, AFSCME, CBIS, Florida SBA, CalSTRS, CalPERS and others announcing a growing number of their votes in advance of annual meetings. Most can be found on ProxyDemocracy.org. If additional funds heed the advice of Pensions & Investments, or if announcing votes in advance of annual meetings is recognized as a fiduciary duty, the number and range of brands would expand dramatically.
Essential Elements of Open CDV
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 hard copy ballots are delivered, there should be no question they can direct where their electronic ballots are delivered. This simple requirement would insure third-party proxy voting platforms and 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 and, eventually, all companies;
- 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.
Under an Open CDV system, voting platforms would 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. Just as institutional investors use the voting platforms of proxy advisors to implement their voting policies, we shouldn’t ask shareowners to affirm every single pre-filled ballot individually. That could be a deal breaker for some people with stock in many different companies who would rather spend their time on other activities.
Varieties of CDV
The only CDV system I know of that allowed shareowners to vote at the push of a button was MoxyVote. One of the strengths of MoxyVote also helped lead to its demise. MoxyVote tied directly to the brokers of shareowners and to the voting platform of Broadridge, so share ownership could be verified and shares voted according to preselected criteria. Unfortunately, MoxyVote had to deal with each brokerage firm and convince them to provide a feed for every joint customer. More importantly, they had to pay a small fee to Broadridge for every vote cast. The more votes were cast through MoxyVote, the more money MoxyVote lost.
MoxyVote used an ordered system of “if then” decisions, depending on how you ranked the “brands” reporting their votes. If your first choice voted this item, follow their example. If not, vote with your second. If your second didn’t vote the item, vote like your third, etc. At one point, I set up my voting hierarchy as follows:
- Investor Environmental Health Network (IENH)
- Center for Political Accountability (CPA)
- Change to Win (CtW)
- Calvert Investments
- Boston Common Asset Management
I had my MoxyVote account set up so that four days before the meeting my stock was voted as recommended by IEHN. If IEHN had no recommendation by then, it was voted per the recommendation of CPA. If CPA had nothing, then it looks to CtW and on down the line until one of my advocates had a position. If none did, I can set the default position to vote with management, against them or abstain.
Of course, I could always go in and override those votes, which I did often, since there were frequently no recommended votes for one of my proxies or for one or more items on one of my proxies. The more funds announce votes in advance of annual meetings, the more accurately such a system can reflect the values of the user. 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.
Another variant of how to implement CDV was proposed by Veronica Dahl, Bradley Coleman, J. Emilio Miralles and Erez Maharshak using an algorithm:
We will use the term passive to describe describe a vote in favor of management, and activist to describe a vote against management. There is no value judgement intended by this word choice. We use these two terms to abstract the type of proposal so that we do not have to distinguish between management and shareholder proposals and votes that are “For”, “Against”, or “Withhold”. Each vote will simply be considered to be either activist or passive…
The user will indicate how activist or passive they wish to vote on each issue type by moving a slider, where the leftmost position will be as passive as possible, and the rightmost position will be as activist as possible…
Voting decisions will be based entirely on the early votes of these pre disclosers, their voting histories and the user’s slider positions.
This model rejects the “brand” competition employed by MoxyVote.
This algorithm does not ask users to decide which pre disclosing institutions they want factored into their voting decisions. This is a tempting, but problematic design choice because most users are not familiar with these institutions, nor do they have opinions on their voting records. In fact, this algorithm only asks users the one question that any CDV scheme that aims to help users vote their values must ask, namely how they want to vote on the issues.
The strength of this system over that used by MoxyVote is that shareowners don’t need to become familiar enough with a voting brand to rank them. A possible weakness is that they are ranking their passivity or activity on an issue, which gets implemented with reference to those of individual institutional investors, which may be equally unknown. Still, either type of system is much more likely to result in votes that roughly reflect the values of the shareowner compared to not voting or always voting for or against corporate board recommendations.
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 Holton (under Selected Publications).
In the 1940s and 1950s hundreds and sometimes thousands of shareowners frequently showed up for shareowner meetings because they frequently deliberated issues and some of those in attendance held substantial proxies from others. Lewis Gilbert, for example, was often given unsolicited proxies, which he used to negotiate motions at meetings. A system of proxy assignments could lead to more frequent negotiations between activist shareowners and corporate boards.
Cost for Proxy Votes Under CDV
Cost categories for CDV include: (a) creating voting opinion feeds; (b) system development for brokers; (c) vote processing by Broadridge and similar service providers.
If the SEC publicly encourages the development of CDV systems, many organizations are likely to build them. As previously mentioned, voting opinion websites have already started appearing (ProxyDemocracy.org and MoxyVote.com). To enhance their quality, public funds earmarked for retail investor education and advocacy could be allocated by investor vote among such competing providers of tools for CDV.
CDV will increase the quality of voting and decrease the quantity and costs of paper mailings. These benefits will outweigh the costs of building CDV systems. Standardized data tagging will likewise streamline the system and reduce costs in the long run, although it will require some up-front investment.
NYSE rules currently require payment by issuers for the cost of voting electronically but issuers were apparently not making such payments to CDV platforms like Moxy Vote. See NYSE Rules 450-460 pertaining to proxy distribution. The Rules were actually written for “member organizations” (i.e., brokers) and specify what brokers or their agents (e.g., Broadridge) can charge for distribution and collection of proxy-related items. The rules are clear that Issuers are supposed to pay for all of the distribution (and collection) costs and that brokers can expect to collect from them. These rules should be amended to apply to Issuers when shareowners choose to take delivery of proxies or to vote through sites like the now defunct Moxy Vote or existing platforms offered by ISS, Glass Lewis and others.
The fees that Broadridge is charging to electronic voting platforms should be paid by the issuers as part of the overall collection costs (like postage). The electronic platforms, in this function, are merely an extension of the proxy distribution agent. However, I understand that Broadridge charged on the order of 10X for electronic vote collection from MoxyVote than it was permitted to charge issuers.
If Broadridge is offering a “value-added” service to these electronic platforms, where is the “baseline” service that costs less? Perhaps the value-added services revolve around the ability to turn blank vote into votes for management without following the rules that apply to proxies. (See my blog post, Jim Crow “Protections” for Retail Shareowners)
My understanding is that fees are charged to electronic platforms on a “per ballot” basis (generally one fee per position per year) and that electronic platforms are generally passing along these costs to voters. That becomes much more difficult, perhaps impossible, when trying to service retail shareowners with small position sizes and many more per ballot transactions, relative to shares voted.
This is, in effect, becomes a system where the voter is paying to vote, like the old Jim Crow poll tax. It also inhibits progress (i.e., the development of electronic platforms for retail shareowners) because voting through the mail and on the phone are free. Why should retail shareowners have to pay when voting online, which is inherently the least expensive method of voting? Why should services like the now defunct Moxy Vote have to front such expenses? Without a change, it is hard to see how they can ever turn a profit and it seems even less likely that nonprofits, such as Proxy Democracy, would ever be able to offer users the option of voting on a Proxy Democracy platform. Such costs need to be eliminated or minimized if a robust open CDV system is to mature.
The NYSE should consider forcing Broadridge to direct some of its “paper suppression fees” to firms like future MoxyVote’s that should be sharing in this incentive, since shifting to electronic from paper voting saves money. That would be a simple way of beginning to address the cost issue. The most fundamental point regarding costs is that issuers should bear the actual cost of voting, not shareowners or CDV systems.
Until that happens, the best we can hope for are systems that push branded votes, algorithmically generated preferences, or other possibilities but that still require the shareowner to copy pre-marked ballots to Broadridge’s ProxyVote platform.
Impact of Open CDV on Proxy Votes
An Open CDV system will increase both the quantity and the quality of voting by both retail and institutional investors. Ease of voting and the ability to align with valued brands or algorithmically generated preferences will drive quantity. Increased quality will result from competition between voting opinion sources for reputation in the eyes of investors. An Open CDV system will cause retail shareowners to engage in proxy voting because it offers several new and powerful ways for us to do so, while respecting our other interests and time constraints. Once they dip their toes in the waters of corporate governance, many will soon be convinced of the benefits of full immersion.
Additionally, institutional investors will begin to discuss their votes with each other more frequently, as well as with beneficial owners and funds. This is already happening. I have personally initiated discussions with several funds and have increasingly been met with a favorable response. As funds learn how and why other funds are voting, many are open to reexamining their own positions.
Director elections in particular will be more closely watched, once shareowners gain a sense of empowerment. Prior to nascent CDV sites, we had little or no basis for voting against or withholding votes from individual directors. Soon we will be able to drill down through recommendations to discover which directors are over-boarded, miss meetings, have potential conflicts of interest, were on compensation committees that overpaid executives, etc. Funds will increasingly provide the reason for their votes, since that will drive more investors to vote with them. When a fund discloses not only their vote, but also the reasons for their vote, investors get a better picture of their values and we begin to trust given “brands” as consistent with our own values.
An open CDV system improves corporate governance because CDV platforms will make it easier for shareowners to meaningfully participate in voting at the touch of a few buttons, without having to read through proxies.
Open CDV systems do this by allowing shareowners to informally build individualized proxy voting policies, much like formal policies maintained by many institutional investors.
Unlike many institutional investors, who may ponder over their voting policies for months, retail shareowners are most likely to build issue-based default policies based on brand identification or algorithmically generated preferences, although other methodologies will no doubt emerge.
I was delighted to read Pensions & Investments editorial Winning Over Proxy Voters, which argues that institutional investors have a fiduciary duty to announce their proxy votes in advance of annual meetings, if doing so is likely to influence voters. More funds announcing their votes in advance of annual meetings is critical for increased dialog around proxy issues and more informed voting by retail investors through robust CDV systems. Lets hope legal scholars, the courts, and institutional investors heed the reasoned call of Pensions & Investments.
Take Action to Improve the Quality of Proxy Votes
Help keep ProxyDemocracy alive. Make a small donation (not tax deductible) or contact Andy Eggers to make a tax-deductible contribution through their 501(3) affiliate. I’ll match donations up to $2,000 until the end of June.
See also Fiduciary Duty to Announce Votes (Part 1): Editorial Calls For Advanced Disclosure and Fiduciary Duty to Announce Votes (Part 2): Historical Background, Fiduciary Duty to Announce Votes (Part 3): Take Action.