It’s the annual shareholder meeting season. If you own individual shares of a company or own shares through a mutual fund or EFT, you are getting notices in the mail or online informing you it’s the proxy voting season. Regardless of how you own shares, it is good to witness the process.
If you are not familiar with this year’s proxy issues, The Conference Board (TCB) has a complimentary summary of the 2022 Proxy Season and the increased activism they are seeing. If you work for a large company, you probably already have access to TBC as part of your company’s overall membership. One way to check is to sign up with your corporate email address. If your company has a membership, you will be able to set up an account. TCB has good content on a host of business issues facing large companies. If your company has a membership, it’s worth exploring. I used my membership for years to help me bring the outside world inside.
According to TBC, there are six trends in 2022 shareholder proposals:
Environmental & Social Proposals (E&S) in General
Human Capital Management (HCM) Proposals
Environmental Proposals
Corporate Political Activity Proposals
Governance Proposals
Company-Sponsored Proposals
Board member elections
Executive compensation reviews
Proxy Firms and Active Shareholders
Below are a few proxy services firms who may either weigh-in or submit in shareholder proposals:
ISS (Institutional Shareholder Services), which, according to their site, is the world’s leading provider of corporate governance and responsible investment solutions. Founded in 1985 and owned by Deutsche Börse Group, along with Genstar Capital and ISS management.
JUST Capital was co-founded in 2013 by leaders from business, finance, and civil society – including Paul Tudor Jones II, Deepak Chopra, Rinaldo Brutoco, Arianna Huffington, Paul Scialla, Alan Fleischmann, and others.
Individual shareholders and ESG active fund managers are possible sponsors of shareholder proposals.
Typically, shareholder proposals are submitted early enough for corporate offices to review and determine if a solution is already in place or if one could be resolved. Depending on those discussions and communications, a shareholder proposal could go to a vote before the company owners. The shareholder proposals are submitted as written, and the company typically responds with what they have done to achieve the same objective.
Who owns public companies?
According to Pension & Investments, institutional investors own between 78% and 80% of the Russell 3000 index and S&P 500 index, respectively. For the largest of companies, institutional owner percentages are even higher. See below.
With this kind of size, institutional shareholders have immense power and influence over the outcome of shareholder proposals.
Who votes during the proxy season?
If you own individual shares, you vote directly.
If you own company shares through a pension fund, mutual fund, EFT, insurance fund, etc., the institutional investor vote on your behalf based on their proxy voting guidelines. Some guidelines are more apparent than others on how institutional investors will vote. I’ve studied these guidelines for several years, and they continue to evolve. Here are a few examples of guidelines from the 2022 season:
Blackrock: Investment Guidelines
Vanguard: Policy Principles
State Street: Climate Disclosure Guidelines
Diversity Disclosure Guidelines
What are the voting options?
Vote For – such votes show clear support for a proposal
Vote Against – these votes show clear opposition to a proposal
Abstain - can show up as “withholding support,” which is usually an indication of less support but not so much that they are willing to vote against it. I’ve also seen this in cases where large shareholders want to send a message to company management that they are not happy with the proposal or compensation, but they do not want to impact the stock price with an outright vote against it. Since abstentions do not affect the vote outcome, this is a signal institutional voters may subtly voice an opposing opinion without voting against the company.
A Voting Example with Abstention:
One hundred shareholders, each with a single share and single vote.
40 Votes For
30 Votes Against
30 Abstained
The proposal would still pass as a majority was reached: 40/(40 For+30 Against).
Company management might have further discussions with the influential investor groups who abstained. Institutional shareholders’ true power resides in whether they hold the stock vs. selling it. Companies want to keep long-term shareholders to support the price and the social signals long-term shareholders send to the broader market.
In 2014, I learned about this method of voicing influential shareholder opinions without impacting the stock price. In 1Q2014, after reading the Coca-Cola (KO) shareholder proposal, it was clear that executive compensation plans were excessive and dilutive to us KO shareholders. While a small investment firm was advocating for Warren Buffett to meet with him and weigh-in, Buffett did not publicly speak on the matter. In my opinion, the media was tough on the small investment firm principle--unnecessarily so. If the press had read the proxy (I realize they don’t have time), they would see that what the activist was saying was accurate.
The executive compensation plan received enough voter support. Nonetheless, Coca-Cola took action after it was disclosed that Buffett abstained from voting on his KO shares, strongly indicating his lack of support for the executive compensation plan. What a lesson I learned by reading the proxy and subsequently seeing how things played out publicly.
Are all shares equal?
Not all shares are 1:1. Some companies like Google, Meta Platforms, Berkshire, Lyft, and others have super-voting rights for different classes of shares.
The multiples of power per share can be significant –something to keep in mind. Some shareholders are more influential by the type of shares they hold.
This season, Shopify is bringing forward a proposal to increase its cofounder’s “founding shares” and increase his voting power. I can see the value of having different voting powers if you have confidence in the holder of the shares. All this to say, you need to know who owns the company you also own.
What do shareholders say on issues?
Large, influential shareholders typically have well-informed opinions – they must as they are making investment decisions to achieve an expected value outcome. However, when asked in a public setting, you may find it hard to get influential investors to share their perspectives. Last week, an investor was questioned on Disney’s response to the recent Florida legislative bill. He ultimately said: “forgive me, I’m just not, I’m not informed enough to really speak to it that much.” This person is a founding member of JUST Capital, and to say anything too controversial would not be suitable for company valuations. I’m not being critical; the work of change for companies through the shareholder proposals seems to follow democratic processes. In other words, progress takes time and, in some cases, a long time as market valuations are typically top of mind on these issues for large shareholders, even if not spoken aloud.
What tends to effectuate more change is having company management move on ESG issues in meaningful, thoughtful, long-term focused, and strategic ways from within the company walls, where management and the board have full power to reshape their future. If the proposed changes come from the very top, change can happen quicker than most would think.
So, consider how much power these shareholder groups have when looking at shareholder proposals and the active voices bringing issues forward. These men and women are owed a debt of gratitude. They are taking a long-term view and seeking continued progress persistently. However, the shareholders with the real power still control the outcomes of these shareholder proposals.
If you are a corporate employee seeking to move into higher leadership roles, business and investor perspectives are keys that open the door to those opportunities.
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