Investing basics: proxy voting and why you should care
It’s a way to have your say as a shareholder in how the companies in your portfolio are run.
Would you own a business without paying attention to how it’s being run and who’s running it?
When you buy a stock, you become a part business owner of that company. Proxy voting is the primary way of allowing shareholders to influence company operations and decisions.
The issues at stake in many proxy votes typically focus on the long-term benefits to a company, making the process that much more relevant for investors and for the functioning of the market as a whole.
Voting on a resolution can feel overwhelming because it means digesting documents, attending meetings and making decisions. Decisions are made by those who show up. Ignoring your ballot means you're foregoing a chance to influence the inner workings of some of Australia's largest corporations.
We asked Australian Shareholders Association policy & advocacy manager Fiona Balzer to walk us through the ins and outs of shareholder resolutions and proxy voting.
So how does proxy voting work?
ASX-listed companies report to their shareholders through annual shareholder meetings and other communications. Companies send proxy statements, with at least 28 days' notice, detailing the resolutions that shareholders will vote on during the meeting.
Where a company has share capital, each shareholder has one vote for each share they hold. You can see an example of a voting/proxy form here.
These days, very few investors attend shareholder meetings in person, which means that most votes are cast as "proxy votes"— by phone, mail or online. Investors can also choose to allow another person or an organisation to vote on their behalf. If you're a fund investor, fund companies vote on behalf of you and other fund investors, too.
What are examples of proxy voting resolutions?
Ordinary resolutions
A typical proxy ballot contains acceptance of the financial reports, a list of directors to be voted on, an item for approving the auditor selected by the board for the fiscal year ahead. The proxy materials accompanying the ballot outline these items.
And since 2011, Australian shareholders have also had the right to vote on how much top execs are being paid.
"This gives shareholders the opportunity to say whether they feel the company is just throwing money at the executives and director," Balzer says.
It’s a crucial vote, Balzer adds, as "renumeration really does reflect and impact the culture of the company".
After the Hayne royal commission, several major banks had large votes against their renumeration report amid investor fury over what they saw as inflated exec salaries. A record 26 companies in the S&P/ASX 300 index recorded strikes during the 2018 AGM season – an increase on 11 the year prior, according to ISS Australia.
Unlike a board resolution, which is an ordinary resolution, the resolution to adopt the remuneration report is a “shareholder advisory resolution". Under the so-called "two strike" rule, if more than 25 per cent of investors vote against a company's proposed remuneration report at consecutive annual meetings, the entire board faces a spill motion.
Examples | Telstra, Harvey Norman, Myer, NAB
Special resolutions
About half of US company ballots also contain additional items. Investors who hold a minimum level of stock in a company directly can file shareholder resolutions. These proposals filed by investors can cover a range of environmental, social, and governance (ESG) issues, such as lobbying disclosure, climate change, diversity, and data privacy.
Several human rights proposals up for vote at this years' Alphabet (GOOG) AGM, ranging from a push for equal shareholder votes to requests for reports on sustainability metrics, to gender and racial pay equity, and human rights-related risks.
MORE ON THIS TOPIC: Human rights on the ballot at Google
Australian company law curbs the ability of a shareholder to bring such resolutions. As the Australian Council of Superannuation Investors explains, shareholders who wish to raise an issue must first propose a constitutional amendment so that shareholder advisory resolutions are permitted. These can only be passed with a 75 per cent vote in favour.
"This makes it difficult for shareholders to hold public companies to account on some important environmental, social and governance (ESG) issues," the council said in a 2017 report.
"This threshold is so high that, to date, none of these resolutions have passed except for the 2016 Rio Tinto board-endorsed resolution in favour of improved climate-related disclosure."
Investors who feel a company is mismanaging their ESG risks are left with the option of voting against directors.
ASCI has recommended the introduction of an ordinary non-binding shareholder resolution framework.
You can see the history of ESG shareholder resolution and statements for Australia's largest 200 public companies at the Australasian Centre for Corporate Responsibility website.
Does proxy voting make a difference?
Yes. There are binding resolutions that can alter the course of a company. Corporate board elections are a key example; board composition can make a difference between one more focused on exec pay that the long-term interests of shareholders.
ACSI, whose members manager over $2.2 trillion in assets, took a stance against all-male boards in 2017.
"Where a company has zero women directors, we may make recommendations to vote against any newly appointed male directors," they say.
The organising efforts for proxy voting have also grown stronger in recent years. In this year’s US proxy season, investors are flexing their muscles, directly organising efforts to vote out board members who dispute climate change.
What role do proxy advisers play?
Despite the importance of proxy voting, individual investors have a poor record of doing it.
"People don't understand that if they all voted their $500 worth of shares, they can actually start moving the dial, especially where the institutional shareholders aren't in agreement about how they're going to vote," Balzer says.
Things have improved during COVID-19 because investors have more time on their hands, she says.
"People have time to go through their mail, and post their votes back," she says. "They've also lifted their electronic participation, attending online AGMs. Shareholders are at their computers, they're more comfortable to pop into an AGM.
"At the AMP meeting, they had 300 attendees at the physical meeting last year. This year, they had 750 attendees online."
Organisations like the Australian Shareholders Association, a not-for-profit individual investor lobby group, meet with company chairs and directing, write voting intentions, and attend AGMS. By collecting shareholder proxies, they also can represent a large number of votes thereby airing the concerns of retail investors.
"Sometimes we turn up and we'll be voting for 700 – 800 people," Balzer says. "With the banks, it's around 2,500 people."
"Retail shareholders should get involved is because it does become apparent in the voting that there were thousands of people who voted against a resolution. This may only account for 5 per cent of the shares, but it makes an impact."
This service doesn't come free. Shareholders don't need to be an ASA member to appoint them as their proxy, but only members can view their voting intentions.
What role do fund companies play in the proxy voting process?
Index investing’s growing market share compounds the importance of the proxy voting process. When actively managed funds dominated, they could lobby management or sell the stock if they didn’t like a company’s direction. Superannuation funds also play a big role in proxy voting. Index funds don’t have a choice in which stocks to own. So while the index providers can lobby management for better governance, ultimately the only lever they have is their votes.
Big fund companies are consequently paying attention to issues listed in proxy voting ballots. Earlier this year, Larry Fink, the chief executive of BlackRock, the world’s largest fund manager, unveiled his new vision for sustainability as the "new standard for investing". Fink argues that ESG risks are reshaping the global economy, and as a result, investors should incorporate this risk into investment decisions and portfolio construction.
Giants like BlackRock have real weight to their proxy voting power. The 25 largest fund companies accounted for 82 per cent of investors' assets in US funds midway through 2019. A Morningstar study of funds 2019 proxy voting patterns shows that in a number of cases, a vote by just one large asset manager would have tipped the outcome on a resolution to a majority vote for the motion.
Balzer says investors can and should engage with their super funds and managed funds on how they vote their proxies. Several funds release their voting records to the ASX or on their website – see BetaShares Global Sustainability Leaders ETF 2019 voting report, Aberdeen Standard, Vanguard, Fidelity International. Superannuation funds similarly disclose - see Local Government Super.
There is room for improvement. Analysis by Reuters shows that major US ETF providers are failing to challenge management how they vote at shareholder meetings. A Morningstar proxy voting 2019 study found that that out of 72 proxy ballot questions addressing social and environmental concerns from companies in S&P 500, BlackRock supported only five.
Don’t ignore your ballots
Proxy voting and investment stewardship are key to protecting long-term portfolio value, note Morningstar's Jess Lui and Carole Hodorowicz.
More broadly, the degree to which the proxy process gives voice to investors' concerns about material ESG factors may shape the resilience of the stock market.
"As investors face great uncertainties during the coronavirus pandemic, the ability of governments to manage the economic fallout will depend largely on the resilience of our global financial system," they say.
"It is essential for investors to remain vigilant in protecting their right to submit shareholder resolutions pressing for more sustainable governance practices."
So next time you receive those proxy ballots, take a closer look at the board nominees and their credentials. Evaluate the shareholder proposals and the concerns they raise about the sustainability of a business’s operations. And, if you’re a fund investor, track how the funds in your portfolio vote across different ESG issues.
As a business owner and participant in the market, you have a right and a responsibility to have your say. In so doing, you contribute to a more resilient financial system.
MORE ON THIS TOPIC (FROM FIRSTLINKS): Voting your shares: it’s worth the effort
Additional reporting from Morningstar data journalist Jess Lui and Morningstar audience engagement associate Carole Hodorowicz.
