Proxy voting guidelines
A proxy vote is a ballot that an individual or firm casts on behalf of a shareholder or corporation. It's common for shareholders not to attend shareholders' meetings. They may not want to attend or may not be able to attend.
Shareholders get a proxy ballot in the mail with an informative booklet called a proxy statement. The proxy statement lists the issues that shareholders can vote on. The booklet also refers to a registered investment management company that casts proxy votes for their securities in their portfolios for mutual fund shareholders or wealthy investors in separately managed accounts.
Proxy voting provides the means for publicly traded companies to report their activities to shareholders at annual meetings. Investment companies have their own proxy voting guidelines, which usually somewhat align with best practices.
Voting by Proxy
Most investors vote by proxy or select someone to vote in their place. It's also common for investors to designate a company manager to vote in according to the shareholder's instructions as written on their proxy card.
Shareholders can be asked to vote on any number of things, including electing officers, approving mergers and acquisitions, approving stock compensation plans, approving the auditor report, approving resolutions, and anything else the company deems relevant.
Shareholders can cast their proxy votes by mail, phone or the internet as long as they do it before the cutoff time, which is usually 24 hours before the start of the shareholder meeting. Typically, shareholders vote by responding “for,” “against,” “abstain” or “not voted.” Once they've voted their choices, they have the ability to change their votes as long as they do it before the deadline.
Plurality Vote and Majority Vote
The proxy voting materials will specify whether a plurality vote or a majority vote applies.
A plurality vote refers to a vote where the winner only needs to get more votes than a competitor. If the individual is running unopposed, he or she only needs one vote to secure a win. Shareholders can withhold their vote if they're opposed to a candidate. Boards of directors may be influenced in their choice of candidates if enough shareholders withhold votes for a particular candidate.
A majority vote simply means that the winner gets the majority of the votes. Voters may abstain from voting, which could affect the outcome of the election. The proxy statement is required to explain how they count abstentions and withhold votes.
Fiduciary Guidance for Proxy Voting from the SEC Roundtable
The SEC Roundtable of proxy voting was created in November 2018 as a think tank to discuss the proxy process and rules. The event was a public forum that allowed for in-depth discussions of the current proxy voting mechanics and technology, the shareholder proposal process, and the role of proxy advisory firms.
The SEC Roundtable released a statement in 2018 by Keith Johnson and Cynthia Williams that produced fiduciary guidelines to reground investment proxy voters in some of the basics of fiduciary duties. The basis of this statement paper is that investor fiduciary duties provide the legal context for exercising proxy voting rights. The authors remind proxy voters of some of the basic fiduciary principles that have remained despite a host of other changes within the financial marketplace. When casting their proxy votes, proxy voters should be mindful of some of their basic fiduciary duties, including prudence, loyalty to beneficiaries and reasonable management of costs.
Duty of Prudence
The paper urges proxy voters to approach their duties using a 'fact-based and forward-looking manner.' They should give reference to the care, skill, diligence and prudence that similar investors use. Proxy voters should account for the practices of peers as a reference point. This is not to say that they should blindly go along with the crowd, but consider their practices within the context of structure, risk appetite, strategy, governing documents, liabilities and the like. In casting their votes, they should investigate and verify the facts and account for how prudent practices have evolved.
Duty of Loyalty
Proxy voters owe their fund participants and beneficiaries absolute loyalty. They should guard against self-dealing, fraud and personal biases while managing their assets to provide promised benefits and cover reasonable expenses.
Conflicts of Interest
The paper notes that conflicts of interest can arise as a result 'from service fees received from companies on whose proxies votes are being cast, business interests in attracting new public company clients and manager compensation structures that are misaligned with the interests of fund participants.' They made a particular point that for current regulatory debates, the investment managers and proxy advisors owe fiduciary duties to their investor clients and not the subject companies.
Public Statements and Vote Consistency
Because of the issue of public statements, especially those that relate to long-termism and voting instructions, additional scrutiny and inquiries might be called for when inconsistencies are apparent. Companies may make a public statement about something they stand for and that the company is moving in that general direction, but perhaps they have not achieved their goals yet. Some investment companies are considering this acceptable as long as the company is addressing the matter. An example of this is a company that is working on implementing ESG issues.
Duty of Impartiality
The duty of impartiality is a fiduciary duty that requires a proxy voter to balance the conflicted interests of different beneficiaries. They must attend to identifying and managing conflicting beneficiary interests.
Duty to Manage Costs Proxy voters have a legal obligation not to waste the finances of participants and beneficiaries. This doesn't mean they always have to make the choice with the lowest costs. It means they need to balance the potential benefits against the expected costs when they select and delegate duties to an investment advisor, manager or other agent. Shareholder voting is an essential corporate governance right that's given under state laws. It provides an important channel for communication between shareholders and companies that supports governance and the relationships between the board, shareholders and management.
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