An Introduction to Proxy Voting

Thousands of public companies hold annual meetings to conduct important business regarding corporate governance and other issues—the election of directors, the ratification of the corporation auditor, amendment of company by-laws, adoption of stock option proposals—just to mention a few. These meetings are open to all shareholders and provide the opportunity to vote on these issues, either in person or by way of proxy. Since the majority of shareholders do not attend the annual meeting (corporations may have tens of thousands of shareholders), most voting takes place by proxy.

Individual shareholders may pay little attention to proxy voting. Since the so-called Avon Letter of 1988 (an interpretive letter from the Department of Labor to the chairman of the retirement board of Avon Products, Inc.), however, proxy voting has been recognized as a responsibility for those plan fiduciaries that are subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). In 1994 (and again in 2008), the Department of Labor issued clear guidelines that stated, “The fiduciary act of managing plan assets that are shares of corporate stock includes the management of voting rights appurtenant to those shares of stock.”

The Department of Labor further specified that when voting proxies, ERISA-bound fiduciaries “shall consider only those factors that relate to the economic value of the plan’s investment and shall not subordinate the interests of the participants and beneficiaries in their retirement income to unrelated objectives.” Determining what is an “unrelated objective” is a tricky matter, but most institutional investors—whether subject to ERISA or not—understand that proxy voting can be an important tool of shareholder advocacy. Proxy voting provides shareholders a real opportunity to influence company operations and policies. Through purposeful proxy voting, shareholders can inform company management how they react to corporate governance policies, environmental practices and sensitive social issues affecting the company. For many shareholders, consideration of these issues is necessary to support sustainable business practices and strengthen the attainment of long-term shareholder value.

Most institutional investors publish their proxy voting guidelines. Some also publish their proxy voting results (how they voted on specific items.) Such public disclosure is the norm among socially responsible investors who believe that transparency is essential to inform stakeholders about their decision-making process.

Corporate Governance Best Practices

Investors may differ on how to vote specific proxy ballot issues, but certain governance principles have been accepted by a majority of socially responsible investors as representing “best practices.” Most investors, for example, agree that sound corporate governance is the best foundation for a sustainable—and profitable—company. Some principles contributing to sound corporate governance include:

  • a primarily independent board of directors, elected annually, with an independent chairperson or lead director
  • diverse (gender, racial and ethnic) representation on the board
  • independent audit, nominating and compensation committees
  • election of directors by confidential, majority vote with equal voting rights for all shareholders
  • auditor independence
  • executive compensation programs that are linked to company performance

Many socially responsible investors also believe that boards should:

  • disclose their political and lobbying contributions
  • allow shareholders some access to the proxy ballot (the ability to nominate directors, for instance)
  • release proxy vote totals in a timely fashion
  • allow shareholders the opportunity to call a special meeting

These principles reflect the prevailing wisdom that boards of directors have an obligation to provide careful oversight of company operations, managing risk effectively and keeping an eye on long-term sustainability. They echo rules adopted by the Securities and Exchange Commission requiring company proxy statements to include information on:

  • compensation policies and their relationship to risk management (for example, whether compensation policies are encouraging excessive risk-taking by employees)
  • the background and qualifications of director nominees
  • any legal actions involving company executives, directors and director nominees
  • the role diversity plays in the consideration of director nominees
  • board leadership structure (including whether the chairperson of the board and the chief executive officer are two separate individuals, and if not, why not)
  • stock awards to company executives (the value of options must be reported as of the date they are awarded)
  • any conflicts of interest involving compensation consultants

The corporate governance policies of the Council of Institutional Investors, an association of large pension funds, endowments and foundations dedicated to effective corporate governance, also provide an effective benchmark for sound governance practices. Their policies are available at http://www.cii.org/corp_gov_policies.

Wespath’s proxy voting guidelines (available at http://www.gbophb.org/assets/1/7/proxy_guide.pdf) align with these widely-held “best practices.”

Shareholder Resolutions

Proxy ballots provide shareholders opportunities to influence companies. One such opportunity is the shareholder resolution. Shareholder resolutions have been a feature of proxy ballots since the 1940s. They may be submitted by individual shareholders and they usually ask that the company take a specific action, such as preparing a report on an issue that affects some aspect of company operations. These issues may be related to corporate governance, but often focus on environmental and social concerns.

Though there is widespread agreement among investors as to what constitutes good corporate governance, there is less agreement on environmental and social shareholder resolutions. Nonetheless, most socially responsible investors agree that environmental and social issues have a profound influence on sustainability and that they should be seriously considered by company management. Accordingly, many investors support resolutions asking that companies prepare sustainability reports. These reports give companies an opportunity to examine such topics as energy efficiency, climate change risk, greenhouse gas emissions, water usage and other environmental issues, and to disclose to shareholders the actions required to mitigate any risk to shareholders.

Likewise, socially responsible investors generally support shareholder resolutions that call upon companies to endorse or operate in conformity with widely accepted international standards of conduct such as the:

  • United Nation’s Universal Declaration of Human Rights
  • United Nation’s Guiding Principles on Business and Human Rights
  • Global Compact
  • International Labor Organization’s Declaration on Fundamental Principles and Rights at Work

Investors file shareholder resolutions for a variety of reasons. One of the most common is to encourage company management to engage directly with shareholders. In other words, a resolution may be filed in the hopes the company will agree to a face-to-face meeting with shareholders. Many resolutions are withdrawn when such a meeting is arranged.

Shareholder resolutions that come to a vote meet with varying success. Many receive little support from shareholders whereas others may receive significant—even majority—support. Regardless of vote totals, resolutions are advisory only; companies may ignore them even when supported by a majority of shareholders. When this happens, shareholders may choose to withhold votes in subsequent years from directors who refused to respond to shareholder wishes.

During 2013, several shareholder resolutions received significant support. A resolution requesting that CF Industries Holdings, Inc. produce a sustainability report describing the company’s ESG (environmental, social, governance) performance received the support of 69% of shareholders. A resolution asking that Hess Corporation report on its political contributions received support from 46% of shareholders. At the other extreme, a resolution asking Chevron Corporation to “adopt a policy to refrain from using corporate funds to influence any political election” was approved by only 3% of shareholders. A low vote total may be misleading. A proxy issue that receives only a fraction of the total shareholder vote still could compel company management to begin discussions with concerned shareholders.

Through mid-September of 2013, Wespath had cast votes on close to 500 shareholder resolutions.

Voting Proxies

For institutional investors owning hundreds—if not thousands—of companies in their portfolios, proxy voting can be a laborious process. Wespath owns shares in approximately 3,000 companies and retains a proxy voting firm. The proxy voting firm provides a computerized voting platform whereby votes are cast based on Wespath proxy voting guidelines. For proxy issues not covered by specific Wespath guidelines, Wespath reviews the recommendations of the proxy voting service before casting a vote.

Proxy voting takes place throughout the year as annual meetings may be scheduled at any time. In the U.S., however, most annual meetings take place between the months of March and June. These months are often referred to as proxy season. After voting, many investors notify the management of companies in their portfolios why they voted the proxy ballot a particular way. This year, Wespath has been writing to companies to explain that we withheld votes from certain director nominees because their boards have less than 20% gender, racial and ethnic diversity.

Conclusion

In the absence of more direct involvement, proxy voting represents the shareholder’s most important tool to influence a company’s governance and business practices. Wespath strives to vote all of its proxies in ways that protect our plan participants and honor the values of The United Methodist Church.

 

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