Standing Voting Instructions: Empowering the Excluded Retail Investor by Jill E Fisch just could be the most important article on corporate governance this year… if it is widely read and acted on. Download at ecgi, Penn Law or SSRN. The above photo is from Small Investors Support the Boards. But Few of Them Vote, The New York Times. Unfortunately, most will not bother to read the article. What follows is both and summary of main points and my commentary. Hopefully, this post will lead to reading the research and adding your voice to those petitioning the SEC to facilitate standing voting instructions.
SVI could help individuals become engaged in corporate governance. At the close of the Constitutional Convention of 1787 Benjamin Franklin was asked if we have a Republic or a Monarchy. His response was, “A Republic, if you can keep it.” Our Constitution is neither a self-actuating nor a self-correcting document. Both countries and companies depend on the active and informed involvement of citizens and shareholders for their continued good health and to avoid tyranny. The SEC’s prohibition against SVI encourages investors to view being a shareholder as equivalent to holding a betting slip. For corporations to take a long-term sustainable approach, we need shareholders who view themselves as engaged members of economic communities.
Standing Voting Instructions: Abbreviated Abstract
From the abstract:
Despite the increasing importance of shareholder voting, regulators have paid little attention to the rights of retail investors who own approximately 30% of publicly traded companies but who vote less than 30% of their shares. A substantial factor contributing to this low turnout is the antiquated mechanism by which retail investors vote…
One of the most promising such innovations is standing voting instructions (SVI)… Although SVI is readily available to institutional investors, the federal proxy rules prevent its use by retail investors… The SEC’s primary rationale for failing to act is the concern that SVI will lead to uninformed voting.
…Ironically, implementation of voting platforms allowing SVI has the potential to make retail investor voting both more efficient and better informed and to increase the legitimacy of corporate democracy.
Standing Voting Instructions: Introduction
Presented in there are my notes, as I read the paper by Professor Fisch. While primarily for my use, I share them with readers in hopes you will reciprocate. How can we strategize around the paper and get SVI implemented?
Fisch starts out by noting that proxy advisors such as Institutional Shareholder Services (ISS) and Glass Lewis (GL) are under constant attack by those who believe their advice is blindly followed. How retail investors vote gets little or no attention, except in close proxy contests. With the elimination of “broker voting” most of their shares may never be voted at all even though regulatory changes have resulted in shareholder votes having more power.
Voting mechanics are the most likely impediment. Institutional investors use third-party platforms and standing voting instructions to authorize voting in advance. Voting is essentially automated according to specified policies. Votes not covered by such policies are the primary cases involving actual human intervention by professional staff. Retail shareholders, who typically do not vote proxies as an occupation, are left without standing voting instructions and must vote each proxy individually.
Problems are reviewed, such as the inability to repeal supermajority standards. History shows several attempts to correct the situation failed to reach fruition because of SVI’s potential to contribute to “uninformed shareholder voting.”
Fisch sets out to refute the risk of uninformed votes, propose appropriate safeguards and argue that standing voting instructions will lead to greater retail investor engagement in corporate governance.
Standing Voting Instructions: Voting Background
Legal and Market Developments
In 1932, Berle and Means identified the separation of ownership from control as a central challenge. Dispersed shareholders with small stakes were had little incentive to monitor and hold management accountable. Today, ownership is again concentrated with a comparatively few institutional investors owning most of the market. The agency costs of institutional intermediaries may have become more important than managerial agency costs. (see Agency Capitalism: Corrective Measures)
Fisch chronicles the historical development of proxy voting as a fiduciary duty and the rise of intermediary services for pensions, mutual funds, and other institutional investors. Although the larges funds, like BlackRock, have considerable staff to review proxies, most have far too many equity holdings to manually review and vote all proxies. Service providers like ISS, GS, and Broadridge provide voting platforms that allow them to vote proxies via standing voting instructions based on each fund’s voting guidelines.
No such SVI opportunities are available to retail shareholders who much vote each proxy separately through proxyvote.com, phone, or by mail. Unlike SVI platforms available to funds, those available to retail are not fully integrated with even federally mandated disclosures. While retail has not been shut out of the electronic age altogether, the visibility of voting issues has not been highlighted and has probably contributed to lower turnout.
Rules in effect since 1937 allowed brokers to vote on behalf of clients on “routine matters” if they failed to vote 10 days before the deadline. Most matters are no longer considered routine. [Note: How the NYSE can consider voting for an auditor routine after Enron is beyond me.
Thumbs are still on the scale, however, since items left blank are voted per issuer’s recommendation and voter information forms used by retail do not have to conform to the proxy card, where SEC rules apply. “Instead, the regulations leave the procedure for obtaining voting instructions to the discretion of the record holder.” “Issuers, rather than nominees or record holders, bear the cost of compliance with Regulation 14B and are required to reimburse brokers for the costs of compliance under a fee schedule set by the NYSE.” [Note: Since issuers pay the costs, they also typically set the voting instructions by default.]
Initiatives to Facilitate Retail Investor Voting
In this section, Fisch discusses the various initiatives. Since Stephen Norman coined the phrase “client directed voting” in 2006, the concept of CDV is generally attributed to him and his work with NYSE’s Proxy Working Group.
On October 24, 2006, the NYSE filed a proposed rule change with the SEC to eliminate all broker voting in the election of directors. Two months later in December 2006, Steve Norman presented a proposal called Client Directed Voting to an investor communications conference.
His voting options were severely restricted to the following: 1) follow the board’s recommendation, 2) vote against the board’s recommendation, 3) abstain, 4) vote proportionally with the retail votes for which the broker has received voting instructions. To me, it looked like a brazen attempt to essentially restore broker votes.
The SEC declined to adopt SVI (CDV as known then) because “it raises a variety of questions and concerns, such as requiring shareholders to make a voting determination in advance of receiving a proxy statement with the disclosures mandated under the federal securities laws and without consideration of the issues to be voted upon.”
Later, the SEC warned SVI might serve as a disincentive for investors to read the proxy. In reviewing other false starts, Fisch boils the SEC’s objections down to a “single essential concern – that permitting SVI would increase the potential for uninformed voting.” Private initiatives, such as ProxyDemocracy and Moxy Vote (as well as their petition to the SEC) are discussed.
ProxyDemocracy is largely dismissed because it includes no voting platform. However, this is a minor inconvenience if the site were funded to keep information and functionality up-to-date. It is easy enough to click on an email from ProxyDemocracy, open a link to grid how several funds voted in advance of a specific meeting. Click on an email from ProxyVote that takes you to your e-ballot (automatically using your control number). Then vote, after reviewing how “trusted sources” have voted, as reported by ProxyDemocracy. Yes, it is difficult if you are doing it all on a smart phone but fairly easy if you open both a phone and a computer — very easy with two computer screens.
Readers familiar with my blog may remember a few of my posts on the subject, including:
- CDV vs FAVE: More Proxy Voting Options, 2/2010
- Q&A on Client Directed Voting, 5/2010
- An Open Proposal for Client Directed Voting, 7/2010
- Investment Clubs Get Moxie, 8/2010
- Who Will Pay for CDV/AVI?, 8/2010
- Take Action: Last Day to Comment on NYSE Rules on Proxy Distribution Fees, 3/2013
- The False Promise of the Enhanced Broker Internet Platform, 9/2013
- Recommendations to Increase Retail Shareholder Participation, 2/2015
- Retail Shareholder Participation in the Proxy Process: Part 1, 2/2015
- Retail Shareholder Proxy Participation: Part 2 – CDV, 2/2015
- Increase Retail Shareholder Participation in Proxy Process, 2/2015
- Retail Shareowners – Facilitating Votes and Activism: Part 1, 8/2015
- Retail Shareowners – Facilitating Votes and Activism: Part 2, 8/2015
One of the more interesting papers cited by Fisch is In Search of the “Absent” Shareholders: A New Solution to Retail Investors’ Apathy by Yaron Nili and Kobi Kastiel. Fisch describes their proposal writing, “the proposal strongly resembles the types of voting arrangements that are currently available to institutional investors.” For example, they could default to vote with proxy advisor or institutional investor. However, their paper does not envision retail shareholders setting up proxy voting policies for each issue that would set up default votes.
Additionally, with regard to options envisioned, unless the shareholder subscribed to the proxy advisor’s service, it is hard to see how that option could be fulfilled. Likewise, they would likely only be able to copy the votes of an institutional investor if that investor announced their votes in advance of the meeting. Moxy Vote’s solution was more robust, since users could use a tiered approach. For example, users could specify their shares should be voted like Calvert if their votes are known. If Calvert’s votes are not known, vote like CalSTRS. If CalSTRS votes are not known, vote like X, and so on.
Fisch also includes a good discussion of enhanced broker internet platforms (EBIP) that are currently undergoing temporary funding and evaluation. I am skeptical that brokers will spend anything above minimum to provide a good proxy voting experience to customers. The broker I use, TD Ameritrade, locates their EBIP deep under a “History and Statements” tab. Under that tab, users must click “Shareholder Library” then eDocuments. Could it be any more obscure? Of course, as Fisch points out there are no options to build outstanding voting instructions, nor is there a link to ProxyDemocracy or other helpful resources to aid voting. Her next section helps explain why.
SVI and Existing Regulatory Constraints
SEC Rule 14a-2(a)(1) limits a broker’s ability to obtain standing voting instructions. To be exempt, the broker must “furnish promptly” proxy materials to the person solicited. Since SVI would take place prior to proxy materials be filed, brokers cannot offer to follow standing voting instructions.
The exemption under rule 14a-2(a)(1) does not extend to a broker’s own expert analysis, recommendations, or information on how other shareholders are voting. Brokers are permitted under a different exemption, Rule 14a-2(b)(3), to furnish not just additional information but explicit proxy voting advice to their clients. The exemption for proxy voting advice applies as long as the broker provides financial advice in the ordinary course of business, does not receive special compensation for the advice, discloses any conflicts or relationships, and is not soliciting on behalf of any participant in the proxy contest. Unlike the exemption under Rule 14a-2(a)(1), however, this provision only exempts the broker from the filing requirements and the obligation to furnish a proxy statement. As a result, a broker who provides advice pursuant to this exemption faces some regulatory risk; the broker could be liable under Rule 14a-9 for proxy fraud. Rule 14a-4(d) also limits, a broker’s ability to ask his or her client for SVI.
Rule 14a-4(d) does not permit a proxy to confer voting authority “with respect to more than one meeting” or for “any annual meeting other than the next annual meeting . . . to be held after the date on which the proxy statement and form of proxy are first sent or given to security holders.” An SVI platform would require a change in the rule to allow the submission of voting instructions prior to the distribution of the proxy statement and that would be applicable to multiple shareholders’ meetings. [footnotes excluded]
According to the authors, only modest changes are needed to permit brokers to solicit standing voting instructions.
- Broaden the exemption under Rule 14a-2 to permit brokers to solicit SVI in advance of proxy statements and to provide additional materials.
- Amend Regulation 14B to require brokers to provide access to voting platforms that include comparable functionality to that available to institutional investors, including SVI. “Alternatively, the SEC could eliminate the pass-through nature of existing Regulation 14B by requiring intermediaries to execute proxies giving beneficial owners the right to vote their shares directly. This would enable beneficial owners to cast their votes directly or by use of an internet-based intermediary like Moxy Vote.”
Standing Voting Instructions: SVI and Uninformed Shareholder Voting
Retail Investors are Unlikely to Engage in Uninformed Voting
The authors argue that retail investors have skin in the game, whereas most institutional investors are mere agents who also may have conflicts of interest. With the growth of indexing, even the investment decisions of retail investors are more likely to be based on firm-specific information.
Second, the use of SVI is consistent with the ability of investors to rely on federally-mandated disclosures. They could change any SVI votes or instructions up until the voting deadline.
Third, SEC disclosures are not the only relevant information. Shareholders have access to a vast array of information, such as voting guidelines of mutual and public funds, as well as media coverage of the issues.
Finally, increased participation by retail shareholders would incentivize communication between shareholders of all types. For example, even without standing voting instructions, there is growing use of the SEC’s Notice of Exempt Solicitation (SEC form PX14A6G). See Proponents Increasingly Proactive Promoting Their Issues.
State Law Voting Rights are Not Conditioned on Informed Voting
Shareholders are free to do whatever they want with their votes, including selling them to the highest bidder. [footnote 214. Hewlett v. Hewlett-Packard Co., No. CIV.A. 19513, 2002 WL 549137, at *4 (Del. Ch. Apr. 8, 2002)
The SEC’s denial of SVI for retail shareholders based on the assumption it will lead to uninformed voting has no basis in law.
Uninformed Shareholder Action is Not in Tension With the Objectives of the Federal Securities Laws
Federal law requires a multitude of disclosures to inform shareholders but “the obligation is on issuers to disclose, not on investors to use that disclosure.” No one actually expects shareholders to read it all. Instead, that information is largely obtained through filtered news and subscription sources.
Allowing SVI for Institutional but Not Retail Investors is Not Warranted
“The risk of uninformed voting is not unique to retail investors.” Lack of resources and conflicts of interests may actually lead to worse decisions by institutional investors, rather than retail.
Wealthy, better-educated and more sophisticated households are most likely to invest in the stock market in general, and, within the overall population of retail investors are more likely to own stock directly, as opposed to mutual fund shares.
Standing Voting Instructions: Implementation of SVI
In their final section, the authors raise several questions about what form SVI should mandate but conclude, “it is neither necessary nor desirable for the SEC to address these questions or to determine the ideal structure for a retail voting platform.” “Rather than concern itself with identifying an ideal protocol, in adopting its regulations, the SEC should limit itself to removing the existing regulatory impediments and implementing minimal safeguards to prevent abuse.”
The following safeguards are recommended:
- Communications must include links to all mandated disclosures, must remind shareholders how their shares will be voted, and that they can change or override SVI instructions.
- Platform providers must be even-handed and neutral, not favoring one position or party over another. Since investors have ready access to information from advocates, “with respect to issues of distortion or bias, the SEC’s approach should focus on the incentives for such distortion rather than the provision of information.’
- “SEC rules should prohibit a voting platform, or anyone that maintains a voting platform from having a financial interest in an issuer, the subject of a shareholder vote, or a relationship to participants in an election contest.” [Would that preclude TD Ameritrade from allowing SVI to its customers on TD Ameritrade’s own proxy?]
- Funding sources should be limited. “The regulations should designate that voting platforms can only be funded by 1) issuers through the NYSE schedule under Regulation 14B or a substantially similar fee structure; 2) brokers that are providing the platform for the benefit of their customers; or 3) customers themselves through direct fees.”
Finally, the SEC might decide that some issues are inherently case-specific and inappropriate for SVI. Accordingly, the SEC rules might provide that, for issues such as a merger or a contested election, the broker may not utilize standing instructions and, instead, has the obligation, at the time the proxy statement is released, to provide notice to the customer and to solicit voting instructions. In such cases, the rules should require that the broker or platform explicitly notify SVI investors that their standing instructions do not apply and that their shares will not be voted unless they take action.
We need to be ready with another petition to end retail voter suppression by changing SEC regulations to allow Standing Voting Instructions. Although Trump promised to “drain the swamp” in Washington, we do not see that happening. However, a petition should be prepared over the next couple of years, ready to go through an SEC less likely to rig SVI as a simple return to broker votes and continued disenfranchisement. Please contact me if you are interested in helping to put together a working group.
Thanks to Jill E. Fisch for such a well-researched paper. I find it ironic that SEC Chairman Jay Clayton claims to be disturbed by the lack of participation by retail shareholders in voting but at the same time appears to favor suppressing such participation by erecting barriers for retail shareholders submitting proxy proposals. For more of my thoughts, see The Individual’s Role in Driving Corporate Governance.