As flowers bloom in spring, so does proxy-voting season—that time of year when public companies ask their shareholders (those whose shares come with voting rights, that is) to cast their ballots on certain matters pertaining to company governance. This makes proxy voting an essential tool for ESG investors, but it may be new territory for many. If you count yourself in this camp, here are three must-know things to get you started.
What is proxy voting?
As a shareholder in a company, you have the right to vote on certain matters. Although this varies by jurisdiction, typical ballot measures include director nominees; structural changes, such as mergers or issuing new capital; executive compensation; or administrative items, such as approving the auditor. Company management determines the voting agenda for both annual and special meetings. In certain jurisdictions, particularly the United States, shareholders can propose items to put on the agenda for a vote, subject to certain requirements. If you can’t attend the regular annual shareholder meeting in person, you can vote by proxy—via physical mail, email, or online.
Although shareholder proposals tend to get a lot of attention, management’s proposed director nominees are where most of the action is, since directors are essentially the voice and ears for shareholders. Determining which individuals are best qualified to oversee management and represent shareholders is arguably the most important function of voting. In 2017 only about 4% of proposals Parametric voted on came from shareholders, and the rest were from management. Of the management proposals, 57% related to board-of-director nominations.
In the case of investors in mutual funds or other collective vehicles, the mutual fund manager is in charge of voting. In the case of investors in separately managed accounts, the investor is the voter. Although larger investors may choose to do this themselves, given the time and expertise required, many defer voting authority to the manager of their account.
How do you vote proxies?
Informed proxy voting requires a careful understanding of the company at which the vote is being cast and the matter at hand. For example, executive compensation is under increasing scrutiny. In addition to concerns about potentially paying for, or even incentivizing, failure, shareholders may also be concerned about potential public backlash against pay packages that seem unfair or the effect on employee morale. Thoroughly analyzing the compensation package, understanding its components, and comparing it to that of peers requires time and expertise. This forms an objective description of the situation that voters can then use.
The next step, actually determining the appropriate vote, is more subjective. For example, this spring's proposed pay package for Tesla CEO Elon Musk was supported by 73% of shareholders and opposed by 27%. It was a performance-based equity award predicated entirely on targeted Tesla market value in 10 years. Shareholders who voted for the package may have liked its relative simplicity or felt it incentivized the kind of performance they hoped to see in the CEO. Shareholders who voted against the package may have been concerned about its unprecedented magnitude or the fact that it ignored other factors, such as company profitability. They may also have wondered why a nearly 20% stake in the company wasn’t already enough incentive. Voters typically maintain a set of guidelines to help them vote consistently, but many votes, especially high-profile ones, require a certain degree of qualitative consideration.
Does your proxy vote actually make a difference?
Generally, the more shares you own in the company, the greater difference your vote makes. Therefore, on an individual shareholder basis, it can be easy to feel like only institutional investors drive the outcome. However, every vote really does count. Even if a single shareholder won’t make or break the end result, the votes in the aggregate do make a difference. This is especially true if individual investors choose to invest with managers whose voting practices align with their own. In this arrangement the end investor can benefit from the manager’s investment in proxy-voting research and decision making. And the manager can benefit from the backing of a large pool of smaller shareholders.
Potential Parametric solution
Our proxy-voting guidelines follow corporate-governance best practices to safeguard shareholder capital, and they consider the relevant environmental and social implications of management and shareholder proposals. These guidelines apply to any account that has delegated voting authority to us.
Jennifer Sireklove, CFA, Managing Director, Investment Strategy
Jennifer leads the Investment Strategy Team at Parametric, which is responsible for all aspects of Parametric’s equity-based investment strategies. In addition, she has direct investment responsibility for Parametric’s Emerging Markets and International Equity strategies and chairs Parametric’s Stewardship Committee. Previously she helped build Parametric’s active ownership and custom ESG portfolio construction practices. Prior to joining Parametric in 2013, she worked in equity research, primarily covering the energy, utility, and industrial sectors at firms including D.A. Davidson and McAdams Wright Ragen. Jennifer earned an MBA in finance and accounting from the University of Chicago and a BA in economics from Reed College. A CFA charterholder since 2006, Jennifer is a member of the CFA Society of Seattle.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.