Proxy Voting 101

Rdan here…The following post is the first of a possible four concerning shareholders, that magic group of owners of publicly traded companies which is invoked as beneficiaries of actions and policies by company officers and Boards. While many readers are well versed in shareholder doings, we also have readers less versed in how this is done, hence Proxy Voting 101 at my request to begin. But if you read news media, all is done for the sake of ‘shareholders’. Lets begin the discussion.

A guest post from Doug Gates, vice president and co-founder of Moxy Vote (
Proxy Voting 101

When you own something you generally expect to be able to control it. This is easy if you’re the only owner – “it’s my car, so I’ll decide when to change the oil.” It gets more complicated when there are multiple owners – “it’s our house, so ‘Honey? Is it time to fix our deck?’” This can create long discussions about budgets, priorities, plans and other issues. Now imagine there are millions of owners. You need to keep these owners informed about what they own and you need their input on big decisions. Organize this mob into a productive committee and you’ll be ready for work in corporate governance.

American companies ostensibly serve at the pleasure of their shareholders, so they periodically look to us for a nudge in the right direction. Our financial and regulatory system has developed the proxy voting process to deliver these nudges and give the shareholders a say.

Here’s how it works in theory: companies assemble proxy ballots and distribute them to shareholders. Shareholders cast their votes, one per share, and the votes are tallied. The result is announced and the business moves on.

Of course, this well-intentioned process is never this easy. Let’s look at this piece by piece:

1. Companies assemble proxy ballots. If you’ve seen a proxy ballot before, you know they don’t usually contain gripping, exciting information. Rather it has information on reelecting a director, appointing an auditor, designating a compensation committee, etc. In their proxy statements, companies recommend how you should vote on each of these.

If shareholders are particularly organized, they can submit their own ballot proposals on specific issues they are passionate about. In general, shareholder proposals are due six months before the vote, they can’t deal with “ordinary business operations,” and are toothless. That’s right — they’re non-binding, although they do put public pressure on management. Shareholder proposals have been used to make statements on issues such as executive compensation, labor relations and global warming. Social activists like PETA and the Teamsters use shareholder resolutions, and they have also been used by activist investors like Carl Icahn and Eric Jackson. Most shareholder resolutions are rejected by voters.

2. Ballots are distributed to shareholders. This is not nearly as easy as it sounds. For various reasons, many companies don’t even know the identities of most of their shareholders. To distribute the proxy materials to unknown shareholders, companies hire a proxy distribution agent, who has relationships with all the brokers, funds and other intermediaries necessary to unravel the ownership chain. Broadridge Financial, a $2.5 billion company, has a near lock on this market. The company sends proxy ballots to the distribution agent, who figures everything out and distributes them to shareholders. Companies can contact their known shareholders by getting their names from the transfer agent they’ve hired to maintain shareholder records.

3. Shareholders cast their ballots – at least in theory. Most shares aren’t bought and sold by individual investors like you and me. They’re controlled by large institutional investors, such as pension funds and mutual funds. With thousands of proxy ballots to vote every year, most of these institutional investors hire a proxy advisory firm to recommend how to vote each ballot. MSCI and The Corporate Library are among a handful of companies that compete in this space. The large institutional shareholders vote because they have the obligation and the resources to figure out the best way to vote.

Small individual shareholders, like you and me, often choose to not vote. If you’ve ever received the thick packet of ballot legalese in the mail, you know why. It takes time and effort to vote when it appears to have little benefit. You can vote on a paper ballot, just like grandpa did, or you can vote via telephone or the Web.

As a shareholder, you’re eligible to attend the company’s annual meeting, which can be a fascinating mix of administrative trivia and theatrics. Just weeks ago, Walmart entertained their shareholders with pep rallies, speeches, the comedy of Jamie Foxx and musical performances by the Barenaked Ladies, REO Speedwagon and Tim McGraw. 16,000 people attended the closed-to-the-public festivities at the University of Arkansas’ Bud Walton Arena.

4. Results. A few weeks after the voting deadline, the company announces the results of the vote, and the business moves forward. Everything starts over in nine months as the next set of proxy ballots are distributed.

As you can see the proxy voting process is simple in theory, but a closer look reveals the complexities of the system and the difficulties individual shareholders face when desiring to vote and influence company management. In our next post, we will discuss what’s wrong with the proxy process and how individuals can increase their participation and influence.

Shameless plug: Doug Gates works at Moxy Vote, which empowers individual shareholders to form sizable voting blocs and get attention in the boardroom. Hear a radio interview here.
Doug has 13 years of experience building and marketing websites at CNET, mySimon, TheFind and Musicmatch, with previous experience as a litigation consultant, and is an MBA from Stanford.