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Does Socially Responsible Investing Work? Part II: Proxy Voting
9 / 10 / 2019
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Proxy Voting: Democratizing Corporate Accountability 

As we discussed in our last post, divestment is a powerful lever for effecting social change, but it’s only one way to infuse public markets with investor values.  Shareholder engagement – interacting with company leadership by exercising shareholder rights and privileges – offers another way. In this post, we explore the power of proxy voting: how it works, how it has evolved, and how technology now allows investors to positively influence corporate behavior with unparalleled ease and efficiency, ushering in a new era of shareholder democracy.

What is Proxy Voting?

In the early days of public stock investing, shareholders who wanted a say on their portfolio companies’ affairs had to be physically present at shareholder meetings.  For anyone holding stocks in multiple companies (like modern-day passive investors) however, this is neither practical nor desirable. In the vein of representative democracy, the proxy system, in which a ballot is cast on behalf of a shareholder at the company’s meeting, was born.

Shareholder resolutions have evolved significantly since activists in the 1960s popularized their use to tackle specific governance issues. In recent years, a remarkable transformation has been taking place: environmental and social (E&S) issues in particular, including proposals dealing with GHG emissions, board diversity, and the monitoring of political influence, are proliferating across the largest US companies, while support among shareholders reaches record highs. In 2017, E&S resolutions surpassed governance proposal filings for the first time ever.

Such unprecedented shareholder activism has put the spotlight on corporate leadership: in May 2017, almost two-thirds of Exxon Mobil’s shareholders defied corporate executives by voting for the company to incorporate the Paris climate agreement into its business models irrespective of the U.S. government’s stance, with similar resolutions winning majority shareholder support at Occidental Petroleum and PPL Corp. Pressing social issues of the day are also beginning to play out in the boardroom, addressing corporations’ involvement with opioid abuse and gun violence in the annual meeting agendas of several high-profile companies like Walmart and McKesson. This kind of shareholder democracy, combined with media visibility and subsequent public pressure, is making it harder for companies to ignore demands for corporate accountability on environmental, social and governance (ESG) issues. 

But Does it Work?

Before they even reach the voting stage, shareholder proposals typically go one of three ways: company management may negotiate a compromise with the proponents, leading to proposal’s withdrawal; the SEC may block a proposed resolution from coming up for a vote (usually related to the format or content of the proposed resolution, and often leading to the resubmission of the proposal once modified); or, finally, a proposed resolution may appear on the ballot and be voted on. 

Among the shareholder proposals that make it to the ballot, most don’t earn enough votes to clear the predefined threshold to pass. What’s more, the vast majority of proposals that do pass are technically non-binding. If even those proposals that win overwhelming approval by shareholders do not carry contractual obligations on the part of leadership to carry them out, can voting on shareholder resolutions really have any impact on company behavior? 

Governance – Tried and True 

To get a sense of whether shareholder resolutions work, it helps to take a long term perspective of their use in US history. In the past few decades, the vast majority of shareholder resolutions focused on relatively procedural corporate governance issues like directorship election rules and compensation schemes.  These issues, though obviously consequential for company leadership, can constitute quite dry reading for shareholders.   

Yet despite the non-binding nature of shareholder proposals, successive waves of corporate governance campaigns over the past few decades have successfully convinced directors to respond to shareholders’ calls for accountability, transparency, and stewardship, evident in the widespread adoption of shareholder demands on issues like annual director elections, majority vote standards over plurality (91% of the S&P 500 by 2018, with adoption rates increasing in smaller companies), and dropping the use of poison pills (60% in 2002 to only 1.4% in 2018).

Furthermore, we observe that as certain practices become industry standard, the number of proposals related to them taper off, signaling satisfaction on behalf of shareholders that their demands have been adequately met by company leadership.  Alternatively, sometimes shareholder demands help pass outright regulatory change that makes compliance mandatory, as with pay-on-say demands enshrined by Dodd-Frank in 2011. 

Rise of Environmental and Social

In recent years, E&S resolutions are increasingly winning shareholder attention and support in voting. The impacts are already visible: shareholder pressure has secured concessions on methane leak mitigation actions from fossil fuel companies like Anadarko Petroleum, Devon Energy, EQT and Energen, and even to a scheme linking executive pay to carbon emissions for Shell. Healthy numbers of withdrawn proposals on environmental and social issues indicate growing acceptance among corporate leadership that business as usual is no longer usual.

Indeed, an analysis of over 2,665 sustainability-related shareholder proposals over 14 years observed that when shareholders filed ESG-related resolutions, the vast majority of companies subsequently exhibited improved performance on the associated focal issue – even when proposals failed to gain majority support. Taken together, these trends constitute strong historical and contemporary evidence that the trend of shareholder activism through resolution votes has, does, and will continue to have an important impact on corporate behavior. 

“As companies recognize the changing investor attitudes on environmental and social proposals, more of them appear more willing to engage with proponents and reach an agreement about disclosures or policy adoptions, resulting in a high number of proposals withdrawn by proponents…The 2018 record number in withdrawal rates along with the record number of support levels for proposals that made it to the ballot indicate an inflection point for environmental and social issues, as these considerations move to the mainstream of investment management.” Harvard Law 2019

The Shifting Landscape

Against the backdrop of the rise of environmental and social issues in shareholder proposals, the landscape for proxy voting is experiencing a sea change. Two main criticisms emerge – first, the lack of transparency and accountability over how major asset managers handle their responsibilities as aggregators of their clients’ voices; and secondly, the convoluted and inefficient system by which proxy voting has traditionally been done. 

Major asset managers claim to take their proxy vote power seriously, but their stated “case-by-case” stance on voting issues makes it hard to systematically evaluate how well their voting actions hold up to their rhetoric. What is clear is that this ad-hoc approach creates opportunities for contradiction: SSGA, known for sponsoring the “Fearless Girl” statue opposite the Wall Street bull statue and for sponsoring a gender diversity index, for example, has failed to support 8 of the 10 gender and diversity shareholder resolutions in its portfolio over the past two years, and all five pay-equity resolutions over the past three. What’s the point of delegating your vote to a proxy if they don’t walk the way they talk? 

Even more broadly, there is an emerging consensus among investment professionals that the proxy vote system is in dire need of an upgrade, with an obvious role for technology to streamline an otherwise onerous and time-consuming process. The number of actors involved, most acting as intermediaries counting up and passing off both electronic and snail mail ballots, is truly dizzying: proxy communications and processing service providers, solicitors, advisors like ISS and Glass Lewis; transfer agents, tabulators and inspectors. In the chaos, untold shareholder votes may not even be counted.

So despite being demonstrably effective in mobilizing change from corporate leadership, the power of proxy voting continues to be constrained by opaque fund managers on the one hand and a senselessly complex, convoluted and archaic process on the other. It’s perhaps unsurprising that as a result, proxy voting participation has historically been quite low for individual investors. Though retail investors directly and indirectly own nearly 80% of US equities, less than 30% typically vote their shares. 

Rock the (Proxy) Vote / Proxy Voting for a New Era

OpenInvest’s proxy voting process (patent pending) makes it easier for the lay investor– and her adviser!– to mobilize the power of the proxy vote. With shareholder resolution voting available with a touch or a click, voting your values has never been so streamlined, nor so democratized.  OpenInvest provides investors with a short summary of ballot measures on issues they care about and the opportunity to swipe to vote for or against relevant ballot measures. 

Now investors can influence the companies they are invested in on their own terms.  Think Google can do more for the environment or gender pay-gap reduction? Recent shareholder resolutions submitted to Alphabet asked management to incorporate ESG metrics into the formulas it uses to reward executives, tying better compensation for leaders to better environmental and social outcomes. Shareholders have also asked for a report on gender pay equity, with specific attention to Alphabet’s global median gender pay gap, policies and risks associated with recruiting and retaining women employees, as well as a review of its sexual harassment policies.  

Never before have investors been as active and influential in aligning corporate behavior with social and environmental values – and with the further democratization of proxy voting through technology like OpenInvest’s, the impacts of mass engagement are within reach. If you believe major companies can contribute to a better world through such initiatives, why not help them along? 

TL;DR: Proxy voting is a time-tested way of improving corporate behavior which has been radically simplified and democratized by technology

OpenInvest is the only place you can vote in shareholder resolutions with a touch, giving power back to the people who own it. We know shareholder resolutions are effective; now there’s a way for the untapped power of the masses to participate in the revolution in corporate accountability taking place before our eyes. Check out recent and upcoming resolutions here for a glimpse of what’s at stake. 

In the next post, the last of this 3 part series exploring when and how socially responsible investment works, we’ll dive deeper into the influence of shareholder activism on company leadership. Stay tuned, and contact us at institutional@openinvest.com to learn more.

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