As mentioned before, I will be on a panel at the 2/19 SEC Roundtable discussing how to increase retail shareholder participation in the proxy process. I’ve been collecting a few thoughts with the help of readers. Time is a major constraint, so I will need to prioritize my main points and will probably end up with a few bullet points by the time Thursday rolls around. In the meantime, I welcome further comments. The SEC agenda is in bold italics. Our thoughts are in normal type.
This panel will focus on strategies for increasing retail shareholder participation in the proxy process. The panel will discuss how technology – by providing better access to information or easier means of voting – might affect retail participation. In addition, the panel will discuss whether the format of disclosure could be improved to increase the engagement of shareholders and how the mechanics of voting could be improved to affect retail shareholder participation.
Can technology help increase retail participation?
How is e-delivery of proxy information working?
When we simply look at retail shareholder participation by proxy delivery method, advanced technology appears more of a hindrance than a help, since those who received printed proxy packages through the mail voted in far greater numbers than other methods. Mixing technologies, by sending notice through the mail to access proxy materials on the Internet, was the least effective method. According to Broadridge, distribution and retail shareholder participation in FY2014 was as follows:
Retail Proxy Voting Participation by Distribution Method, FY 2014
|Delivery Method||Millions Distributed||% Positions Voted||% Shares Voted|
|Mail Full Pack||34.2||31||40.8|
|Notice & Access||52.4||4.7||18.7|
Of course, distribution of proxies is not the only way technology can impact retail shareholder participation. The SEC raises several questions below and in their last group of questions on client directed voting, which I discuss in Part 2 of this post.
Our laws and regulations have failed to keep up with technological developments in the way we invest. We saw the dire consequences of that fact in the Great Recession. Most investors have not really been buying or holding ‘shares’ since 1975. Additionally, with the dissolution of defined benefit plans, more and more of our investments are channeled through collective investment trusts that are not regulated by the SEC.
The ‘elephant’ in the room is that retail shareholder participation is low, at least in part, because we do not legally own shares. The disconnect between our investments and our legal rights to ownership has consequences. Since I do not expect this to be a topic of discussion at the SEC roundtable, I’ll save my coverage of the topic to Part 3. Here I will just say that, in my opinion, if most of our ‘stock’ investments were in actual shares, instead of derivatives, retail shareholder participation rates in the proxy process would be much higher. Corporate elections would be a topic of serious discussion. More thoughtful debate regarding how our corporations are governed would lead to a better alignment of resource allocation and human values.
How has the NYSE enhanced broker internet platform affected retail participation?
It looks like the SEC went ahead with a program to incent e-delivery and voting through brokerage websites. Although I commented on part of the original proposal (The False Promise of the Enhanced Broker Internet Platform), I have not followed subsequent developments. Who is using EBIP? What does it look like? Is it essentially incentivizing shareholder’s to yield their votes to corporate boards?
Are there impediments to voting through mobile technologies?
I will be mostly in listen mode. Mobile technologies hold great promise. See Announcing Proxy Votes Improves Corporate Governance under the subheading ‘Varieties of CDV.’
Are there legal or practical impediments to holding virtual meetings?
I will raise the usual objections to shareholders being physically locked out of our own meetings. Best practices notwithstanding, Delaware law allows virtual-only meetings contingent upon shareholders simply being able to hear what is going on. See Virtual Shareholder Meetings Reconsidered by Lisa Fairfax from the first panel and my own post, Virtual Meetings.
Virtual meetings also allow the issuer to exclude media. For many companies, media coverage is the only information the vast majority of shareholders have of important issues confronting a company at an annual meeting. For the evidence of the importance of public opinion on proxy votes, see Influence of Public Opinion on Investor Voting and Proxy Advisors by fellow panelist Reena Aggarwal.
If companies do hold virtual OR hybrid meetings, shareholder proponents should be able to present their proposals via YouTube, phone or whatever electronic method they choose.
Would tagging proxy information help shareholders more easily find information relevant to them?
It would certainly help data crunchers and some of that would filter out to retail. All items voted on in the proxy should certainly be XBRL tagged. It would also be helpful to tag additional factors, such as metrics that are measured to determine the reimbursement of named executive officers (NEOs). Investors need to be able to compare these factors more consistently across companies. For example, what companies are rewarding NEOs for increasing the return on invested capital or lowering carbon footprint.
It is also critical to include N-PX filings if retail shareholders are going to be able to use mutual fund voting in advance of meetings to be able to help guide their voting. See SEC-IAC recommendations. Tagging N-PX filings would not only increase retail participation by letting them copy institutional ‘brands,’ it would also put pressure on institutional investors to improve their voting. The easier it is for retail investors to compare the quality of institutional voting, the more impact they will have on increasing institutional voting. An institution’s reputation for voting quality would become an important factor in choosing where to invest, perhaps most importantly when it comes to index funds.
Besides tags for all the fields that are presently supposed to be disclosed in N-PX filings, an important additional tag would be to identify the individual advisors for each fund. This information is especially important where funds are sub-advised and proxy voting responsibility is delegated to the sub-advisor. Across a family of funds, this gives rise to inconsistent voting and also makes it difficult to hold a fund manager accountable for their vote decisions.
Does the format of disclosure affect retail participation?
Yes, of course. If shareholders can vote against a director, that means more to most than withholding a vote. Incorporate by reference my letter to the SEC of October 20, 2010, which raised objections to the following:
- Despite section 957, of Dodd-Frank, which prohibits broker voting with respect to “significant” matters, the SEC has not, to my knowledge, made a determination that all proxy matters are significant.
- Rule 14a-4 confers certain protections with regard to the format and substance of proxies, which are not afforded Voter Instruction Forms (VIF). This makes little sense when 85-90% of shares are held in street name and are voted using a VIF. The following table indicates just two specific examples of shareholders being injured by the current system (there may be many more):
|SEC Rule||How Owner Rights are Violated|
|1. Rule 14a-4(b)(1) specifies that when the security holder does not specify a choice, a proxy may confer discretionary authority “provided that the form of proxy states in bold-face type how it is intended to vote the shares represented by the proxy in each such case.”||Instead of highlighting each ignored item in bold as now being voted per management or the soliciting committee, ProxyVote includes the following more obscure statement. “If you select the SUBMIT button at the bottom of the agenda without specifying choices among the boxes below, your vote instructions will be cast in accordance with the recommendations of the Board of Directors.”|
|2. Rule 14a-4(a)(3) states the proxy “shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders.”||Again, VIFs don’t have to follow rules required for proxies. Broadridge can simply reference “a shareholder proposal described in the proxy statement,” rather than clearly describing the resolution, as is required for proxies.|
What changes to the format of disclosure can be made that could increase retail participation? The issue of blank votes was discussed in my May 15, 2009 petition to the SEC to amend Rule 14a-4 and my October 20, 2010 comments to the SEC.
I recommend Rule 14a-4 be amended as follows:
(a) The form of proxy, including voting instruction forms…
(3) Shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders. No reference need be made, however, to proposals as to which discretionary authority is conferred pursuant to paragraph (c) of this section.
(b)(1) Means shall be provided in the voting instruction form and proxy whereby the person solicited is afforded an opportunity to specify by boxes a choice between approval or disapproval of, or abstention with respect to each separate matter referred to therein as intended to be acted upon, other than elections to office. Neither a voting instruction form nor A a proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the beneficial owner or security holder. provided that the form of proxy states in boldface type how it is intended to vote the shares represented by the proxy in each such case. When votes are cast and fields are left blank, the beneficial owner or security holder shall be deemed to have abstained on those matters. Furthermore, when votes are cast using an electronic platform a subsequent screen, before final submission, must warn the security holder in large-font boldface red type that each field left blank will be treated as an abstention, and that no vote will be cast on their behalf regarding those matters. Nothing in this paragraph shall be construed to prohibit a security holder or beneficial owner from explicitly assigning their proxy to a third party…
Delete subdivision (c) A proxy may confer discretionary authority to vote on any of the following matters:
The integrity of the voting system is critical. The SEC’s current rule sends the wrong message to shareowners. It says, “don’t worry about voting. If you leave an item blank, we will allow that vote to be assigned to someone else,” regardless of possible conflicting or nonaligned interests of brokers, banks and corporate management. The current rule does not reinforce a robust market or vigilance by shareowners. It does not send a message that voting is important. Shareowners then become shareholders, without responsibilities, much like gamblers with betting slips. The Commission should encourage responsible ownership, not gambling.
The SEC should regulate the power relationships between actors in the market to provide a level playing field, not tip the balance to one party when the other fails to act. Instead, the SEC should remind each party of the importance of their respective roles. The current Rule 14a-4 misaligns interests by yielding disproportionate control to brokers, bankers, managers and boards, instead of educating and engaging shareowners.