A Primer on Proxy Voting

A discussion about how proxy voting works and why it matters.

Jackie Cook 23 June, 2020 | 1:10AM
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Tom Lauricella: This is Tom Lauricella for Morningstar, and I'm here with Jackie Cook, director of stewardship research at Morningstar, to discuss how proxy voting works and why it matters. Jackie, thanks for being here today.

Jackie Cook: My pleasure.

Lauricella: Let's start off with the basics. Proxy voting is something that can be a little bit "inside baseball" when it comes to the investing world. Many investors might come across the term here or there. At the same time, it's something that, even if it's not the most common term among individual investors, it's becoming more and more important in the investing world at large. So, why don't we start off by just explaining a little bit about how proxy voting works and what it is.

Cook: Proxy voting gives investors voice. It gives them a say in the governance of companies in which they invest in their portfolios. Most classes of equity shareholding give investors some sort of voting rights, and these rights can be used to cast votes on proxy ballots that companies issue before annual and special meetings. Typically, these ballots contain a variety of items that help investors shape corporate governance and strategy at the companies.

Lauricella: Proxy voting, could it just be simply another way to say that as a shareholder in a stock, you're able to vote in how that company is run? Is it really just as simple as that, even if the word proxy might be a little confusing?

Cook: Yeah. So, the word proxy, really, it's the default. Very few shareholders show up at the annual general meeting in person to cast their votes. They usually cast their votes by proxy, by mail or online. The term proxy voting is really the default term for shareholder democracy, I guess.

Lauricella: Got it. If I invest through mutual funds, how does proxy vote voting work there? I don't actually own these stocks in my own account. I'm not going to be actually getting these ballots mailed to me. How does it work in that case?

Cook: Well, that's a good question because as a fund shareholder, you don't actually hold the vote. Your fund holds the vote and casts that vote on your behalf. And your fund is obligated to cast that vote in your best interests as a fiduciary. So, often what happens with funds is ... well, voting is actually a strategy that sets more at the fund provider level, at the asset-manager level. Individual funds in which you invest, their voting strategy will align more with the voting position of the asset manager offering that fund. Sorry, I should just point out, with respect to index funds, the degree to which individual fund managers will have sway over their vote is far reduced, because voting strategy is typically much more centralized.

Lauricella: The key here is that when I own a mutual fund, the mutual fund company is casting those votes on my behalf and on my interest. And so, if I'm an investor with a particular point of view on anything, it's really going to be in the fund manager's hands. It's going to be their view on how to handle a particular situation at a company.

Cook: That's right.

Lauricella: How about if you give us some examples of proxy voting resolutions that can hopefully shed a little bit more light on what this term means.

Cook: Right. On how shareholders are able to have an impact on corporate governance. So, if you take a proxy ballot, let's take just a typical proxy ballot that would be issued prior to an annual general meeting of a large public company. That ballot probably contains around 15 items, approximately 10 of which would be electing the board of directors. Usually companies offer investors an advisory vote on executive compensation. And on every annual general meeting ballot, you'll also see an item that gives investors an opportunity to ratify the selection of the auditor for the following fiscal year.

On many large public company ballots, you'll also see items that are placed on the ballot by shareholders, and these are items that more specifically get to the governance of environmental and social risks at the company. So, whereas you can shape corporate governance by voting across the board of directors and voting a thumbs up or thumbs down on executive pay, the ability of shareholders to file shareholder resolutions and have those appear on the corporate ballot really helps shareholders shape the conversation around corporate governance and the governance of environmental and social risks.

Lauricella: Investors may have now heard the term sustainable investing. How does proxy voting relate back to sustainable investing, and can you give us some examples of some resolutions that might be related to that particular area?

Cook: Right. Proxy voting isn't necessarily sustainable investing, but it's certainly an essential part of sustainable investing. It's hard to argue that you're a sustainable investor if you're not taking into account the impact of your proxy votes. And I'll give you some examples. Even if you're casting your proxy votes across management ballot items, you're still shaping how well a company manages environmental and social risks. There are examples of where shareholders have run campaigns against certain directors up for nomination for a board, where that director has failed to navigate important social and environmental risks on behalf of the company or where, for instance, executive pay might be completely out of whack with the median worker pay at that company.

So, it's important to make a point that proxy voting across the ballot is a question of sustainable investing. And particularly when we get to the shareholder resolutions on the ballot, there you see these issues being more explicitly dealt with. And I'll give you some examples of the issues that come up. One very important issue for shareholders is how companies are preparing for the low carbon transition. Many shareholder resolutions ask companies to set and disclose what the greenhouse gas emission reduction targets are.

Another group of shareholder resolutions ask companies for transparency into their corporate political influence, how they spend corporate money lobbying or contributing to campaigns and their affiliations with trade associations that do this lobbying on their behalf. So, trade associations have been lobbying actively against worker protections and climate policy. This is one area in which sustainable investors want to be really mindful. And some other examples are diversity, workforce diversity, gender pay equity. These are all the types of issues that come up for vote on proxy ballots.

Lauricella: Does proxy voting make a difference?

Cook: Yes, it does. A lot of academics have looked into the impact of proxy voting. And often, it's not easy to say this particular vote caused this particular change at a company, or this particular change within the market. It's an iterative process. And a lot of shareholders who run shareholder-resolution-filing campaigns, for instance, take a long view of their campaigns.

But proxy voting does make a difference. It's about investor vigilance, and therefore, it benefits the entire market to have investors that are monitoring what's going on at the company and how well the company is managed. And it's part of the ecosystem of checks and balances. So, for instance, it's not the only way that investors can influence corporate governance at companies. Another way is by engaging directly in dialogue with the company. But, of course, the vote underscores the position that an investor has in dialogue with the management of the company.

Lauricella: So, for the individual investor then who's watching this, then the question is, how do I make a difference? How can I have an impact anywhere in this process?

Cook: That's a good question because more and more people want their investments to align with their values. And so, you want to invest, for instance, in a sustainable fund. Well, if you look closely at the fund's proxy voting record, you want to see that their proxy voting record aligns with your values as well. And sometimes it doesn't, and then you want to consider, am I in the right fund? For investors that are in index funds, for instance, and they have choices between some very similarly shaped index funds. When you start looking at the proxy votes that the funds cast, you see that they actually can be quite different in their voting on sustainability or in the impact that their votes have on sustainability.

So, it is important to know the votes that your fund is casting on your behalf. And when you know those votes, and you might feel that these votes should be cast differently, reach out to the fund manager or the asset manager. Make your views known. There is an interesting platform called yourstake.org that facilitates this kind of communication between the fund investor and the fund itself.

And then, thirdly, vote with your feet. If you're not happy with how your fund's voting, if you really are concerned about, for instance, climate change, and you're concerned that the company's not moving quickly enough on climate change and your fund voted against a climate resolution, a resolution asking an oil and gas company to be transparent about how it intends to reduce its carbon emissions, then you may just want to look for an alternative fund.

Lauricella: Great. Thanks very much, Jackie. This has been very helpful. Jackie Cook, director of stewardship research. Thank you for being here today.

Cook: My pleasure.


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Jackie Cook

Jackie Cook  is director of sustainability stewardship research for Morningstar.

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