The process for most American shareholders voting on corporate matters goes like this:
- They receive a notice of an upcoming board meeting and voting that will take place during that meeting.
- They receive an invitation to allow a proxy to vote for them, and they accept that offer, thus giving another person the right to vote on their behalf.
- That other individual must follow a fiduciary duty to vote in the best interest of the shareholder, so often they enlist the support of a Proxy Advisory Firm, which will provide guidance regarding the issues being proposed.
The process is mostly automatic for most individual investors, and those investors know nothing about the results of the vote. Those investors may not care about the results of the vote; the topics tend to have a big picture focus that goes beyond the specific interests of investors.
But the Spectrem study Exile of Main Street: Providing a Voice To Retail Investors on the Proxy Advisory Industry shows that when retail investors are informed about the impact of the proxy voting process, they express concern that their interests are not represented properly.
And the topic that complicates the issue, which upsets those retail investors, is when corporate decisions lean towards a political or social activism approach rather than an approach that will maximize corporate earnings and profits.
The Spectrem research was aimed to determine the disconnect between the expectations of retail investors and the influence of proxy advisors. In many cases, the investors who participated in the study were unaware of the issues that surround proxy advisory voting, but when informed of those issues, expressed significant concern.
It is always surprising to find out how many wealthy investors are uninformed about the details of their investments and the way American markets work. The proxy voting system is a dramatic case in point. While there are investors who are not going to take the time to properly educate themselves in order to vote their shares themselves, a notable proportion indicate the need for the proxy advisory system to be mindful of the interests of the investors.
The problems which some corporate observers and federal watchdogs identify include the previously mentioned political or social activism of corporations, conflicts of interest that exist in the proxy advisory companies, and insufficient transparency in the voting process and results. Because so many shareholders vote via proxy, it is uncertain whether the wishes of the shareholders are properly conveyed.
The U.S. Securities and Exchange Commission (SEC) is determining whether the proxy voting apparatus needs to be changed to address the above-mentioned concerns for the so-called Main Street investors who own 30 percent of public corporations in the United States.
As the report states: “When asked to decide between return-focused objectives and political/social objectives, 91 percent of investors demonstrated that they prefer maximizing returns over political/social objectives. In fact, 17 percent of the sample fully aligned with return maximization, whereas only 0.2 percent fully aligned with political/social objectives.”
“Ordinary investors and retirees, whose life’s wealth has been entrusted to professional money managers, are concerned that proxy advisory firms who lack any statutory authority, have significant influence over the future of their investments,” said George H. Walper, Jr., President of Spectrem Group. “These investors’ inability to influence the proxy process – as demonstrated by their low participation levels – is symptomatic of a system in which Main Street investors feel disenfranchised about their ability to influence voting outcomes in companies whose stocks they own.”
Some of the key research revelations include:
- Prior to the survey for the study, 50 percent of investors said they were not at all informed about the proxy advisory industry.
- However, at the same time, 64 percent of those investors supported SEC oversight of proxy advisors, while the remaining third had no opinion on the subject.
- Once investors were notified of the issues the SEC is considering to increase oversight of, 85 percent agreed with the need for the SEC to examine the issues to ensure investors’ interests are being met.
The Spectrem study was designed in collaboration with J.W. Verret, board member of the Investor Advisory Committee of the Securities and Exchange Commission.
©2019 Spectrem Group