Would you own a business without paying attention to how it’s being run and who’s running it? No.
When you buy a stock, you become a part-owner of that company. Proxy voting allows shareholders like yourself to influence company operations and decisions; it’s the primary way that you can have a say in how public companies around the world are governed. 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 functioning of the market.
How does Proxy Voting Work?
Publicly traded companies report to their shareholders through annual shareholder meetings and other communications. Companies send proxy statements, detailing the resolutions that shareholders will be voting on during the meeting.
These days, very few investors attend shareholder meetings in person, which means that most votes are cast as "proxy votes" either online, by phone, or by mail. If you're a fund investor, fund companies vote on behalf of you and other investors in the fund, too.
What are Some Examples of Proxy Voting Resolutions?
A typical proxy ballot contains a list of directors to be voted on, an item for approving the auditor selected by the board for the fiscal year ahead, and an item requesting shareholders to vote on the pay of the top five executive officers for the previous fiscal year. The proxy materials accompanying the ballot give information on each of these items.
As an investor who holds a minimum level of stock in a company directly, you can file shareholder resolutions and vote your stock. 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.
Does Proxy Voting Make a Difference?
Yes. There are binding resolutions that can concretely reshape the course of a company. Corporate board elections are a great example; board composition can make a difference between one packed with cronies who will line executives’ pockets versus one with a long-term focus on shareholder returns and, in the case of ESG practices, the bigger-picture impact of a company. The organising efforts for proxy voting have also grown stronger in recent years. In 2020’s proxy season, investors are flexing their muscles, directly organising efforts to vote out board members who deny climate change.
Even the non-binding proposals such as the advisory vote on compensation practices can help influence and change the incentives of company executives. The range of items up for vote on a proxy ballot affords shareholders an opportunity to weigh in on the governance and direction of a company, and this has real effects at the company level as well as across the whole economy. Managing ESG risks can provide immense long-term benefits for companies and, in turn, for investors.
Fund Companies and Proxies
The growing market share of tracker funds compounds the importance of the proxy voting process. When actively managed funds dominated the industry, they could lobby management or sell the stock if they didn’t like a company’s direction. Passive funds don’t have a choice in which stocks to own - so while the index provider can lobby management for better governance, ultimately the only lever they have is through their votes.
Without a doubt, big fund companies are paying attentions to issues listed in proxy voting ballots. Earlier this year, BlackRock chief executive Larry Fink unveiled his new vision for sustainability as the "new standard for investing". Fink argues that environmental, social, and governance risks are impactful throughout the global economic landscape, and as a result, investors should incorporate this risk into investment decisions and portfolio construction.
Practicing What you Preach
Large fund companies like BlackRock have real weight to their proxy voting power. The 25 largest fund companies accounted for 82% of investors' assets in US funds midway through 2019. Morningstar's study of fund family’s 2019 proxy voting patterns shows that in a significant 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.
BlackRock’s proxy voting track record certainly has room to improve. Our 2019 proxy voting study found that out of 72 proxy ballot questions addressing social and environmental concerns from companies in S&P 500, BlackRock supported only five. As BlackRock continues to pose a strong stance for sustainable investing, coupled with the trend that ESG-related shareholder resolutions were supported, on average, by 29% of investor shares voted in 2019, proxy voting has the potential to create tipping points leading to sustainable business practice.
Don’t Ignore your Ballots
Proxy voting and investment stewardship are key to protecting long-term portfolio value. More broadly, the degree to which the proxy process gives voice to investors' concerns about material ESG factors will 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. 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 close look to see if nominees for board positions are leaders or cronies. Evaluate the shareholder proposals and the concerns they raise about the sustainability of a business’ 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 for the future.
