Votermedia Finance Blog

January 29, 2010

Investor Education on Proxy Voting

Filed under: Uncategorized — Tags: — Mark Latham @ 2:08 pm

Like my previous post on January 23, this is an update for individual investors on how I am representing them on the SEC Investor Advisory Committee. I submitted the report below to the Investor Education subcommittee earlier this month:

TO: SEC Investor Advisory Committee’s Investor Education Subcommittee
FROM: Mark Latham
RE: Recommendations for investor education on proxy voting
Date: January 7, 2010

1. Proxy voting is important.

This almost goes without saying, but deserves emphasis because it is so fundamental. Voting is the primary means for holding corporate directors and management accountable to shareowners. It is the cornerstone of good corporate governance, essential for the performance of our economy.

2. Proxy voting by retail investors is important.

It’s important in principle, and we should make it important in practice.

Retail investors hold on average about 30% of the stock of large U.S. corporations. (The percentage varies widely across companies.) Institutional investors (mutual funds, pension funds etc.) hold the rest. 30% of outstanding shares is a substantial proportion, easily enough to change the outcome of many proxy voting results.

We individuals shouldn’t just leave voting to institutions. Although they have professionals to make voting decisions, there are potential problems of conflicting interests and lack of accountability of institutional investors. Thus individual investor voting is important not only in itself, but also as a loyalty and quality check on institutional voting. We retail investors are the beneficial owners of all the stock held and voted by institutions. Once we become more capable of voting the shares we own directly, we will also be capable of asking why some of the shares we own via institutions are voted so differently from the way we would vote them ourselves.

Companies often need retail votes to reach quorum – a legal requirement grounded in the principles of accountability of elected leaders.

Perhaps most important: Empowerment by informed voting can counteract many retail investors’ growing sense of alienation from and anger toward corporate boards and managers. These feelings are quite justifiable and have been exacerbated by our recent financial crisis. If ignored, they could undermine popular support for our economic and political systems.

3. Few retail investors vote.

Almost all institutional shareholdings are voted – about 70% of outstanding shares. We retail investors vote on average around 30% of our 30% holdings, so about 9% of outstanding shares.

The trend toward electronic notification of online proxy materials instead of paper mailings is desirable to reduce costs, but is further decreasing retail voting rates.

Until January 2010, brokers could and generally did vote in director elections the retail shares that individuals did not vote. Those broker votes mostly followed the boards’ recommendations. The recent amendment of NYSE Rule 452 has stopped that practice. This has highlighted the need to get more retail investors to vote. Even though the change has dramatically reduced the number of retail votes cast, it was a positive change because the quality of those retail votes was low. Little or no critical judgement was applied by most brokers in those “decisions”. This distinction underscores the point that quality of voting is more important than quantity.

The sad fact remains that even the votes actively cast by us retail investors are often of low quality, since we are not well informed. Voting quality is harder measure than quantity, so quality tends to get ignored by those who search where the light is instead of where they dropped their keys. Even though it is hard to measure, we should look for ways to increase the quality of retail voting decisions.

4. Retail investors lack the resources to vote intelligently.

It’s not that we retail investors lack intelligence. We lack the time and expertise to analyze proxy voting issues – board elections, executive compensation, mergers etc. We lack the economic incentive to spend the time and to gain or buy the expertise. So those who do vote tend to follow the board’s recommendations – the only professional advice conveniently available.

By contrast, institutional investors are much better organized to use specialized professionals for voting decisions.

Most people realize there’s no point in casting uninformed votes just for the sake of voting. That plus the difficulty of becoming informed are key reasons why many do not vote.

5. New tools for intelligent retail voting are now appearing.

These tools are the retail analog of the specialized team approach used by institutional investors in their proxy voting decisions. Fund managers don’t read all the proxies of all the stocks they hold and decide how to vote each issue. They have professional staff for that, some in-house, some out-sourced. (The beneficial owners of those stocks – e.g. retail investors in mutual funds – don’t read and make voting decisions on all those proxies either.)

Likewise it would be inefficient for every retail investor to read all the proxies of every stock we own directly. Instead, we can specialize too. Some of us can read proxies and share our insights on how to vote. We can also get insights from some institutional investors who choose to share their voting decisions before the deadline. We can discuss the voting records of those institutions, and share insights on which are worth emulating.

Two new websites offer free platforms for this: moxyvote.com and ProxyDemocracy.org. A third, TransparentDemocracy.org, has similar plans. No doubt more such sites will appear, and existing investor sites will add such functions.

Most of us retail investors will not want to spend much time on proxy voting. But this specialization strategy will enable us to vote intelligently – even those who only spend a few minutes on it per year. All we need is a convenient option to select which source of voting decisions we want to emulate. I expect that when such options are offered on retail broker websites, we will see a rapid rise in the quality and quantity of retail investor voting.

One way for that to happen would be if some websites where retail investors share voting insight, start publishing “proxy voting feeds” on the internet. Similar to blog RSS feeds, these would have a standardized format for transmitting and receiving proxy voting decisions. Anyone could publish a feed, and anyone could subscribe to any published feed. You would instruct your broker to vote your shares according to the decisions in your chosen feed. You could change your choice of feed at any time, and manually override any specific voting decision.

We could call it Feed-based Automated Vote Emulation – the FAVE system! 😉

I’m not saying that we individuals should abdicate responsibility for making voting decisions. Quite the contrary. This is the most powerful and effective way I can think of for us to fulfill that responsibility.

6. We should encourage the development of retail voting tools, then educate investors to use them.

Without tools to facilitate intelligent voting, educating investors on the mechanics of voting will create little public benefit. (Example: Broadridge’s website shareholdereducation.com.) Increasing the quantity of votes is pointless if those votes have low quality. That is why the SEC and the NYSE stopped broker voting.

Here are some ideas that we could suggest to the SEC for encouraging more and better retail investor voting:

(a) Mandate data-tagging (e.g. XBRL) of proxy and vote filings, to facilitate creating public databases. This proposal is already making its way through the Investor as Owner subcommittee. Let me know if you’d like to see the current draft. A data-tagging standard could also lay the foundation for publishing shared voting decision feeds.

(b) Issuers now pay the costs of sending proxies to retail investors and tallying incoming votes. Adapt and expand this system to pay the cost of electronic vote submissions. Issuers are now paying over $5 to mail proxies to many individuals, but are not paying the full cost of electronic vote submissions. An estimated 35 to 75 cents per ballot is being charged to the voter or voting agent. If we want individuals to vote, there should not be a fee to do so. I have raised this issue in the Investor as Owner subcommittee, but it would help to have support from the Education subcommittee too.

(c) Retail investor voting is hampered by a severe collective action problem. There would be substantial public benefit from increased quality and quantity of voting, but there is virtually zero economic incentive for each retail investor to vote. Therefore we are unwilling to pay for voting tools individually, which has slowed the development of these tools. It would make sense for us to pay collectively. The SEC could consider how to organize such collective funding. (Allocation of public funds by vote is the best way I know, as proposed in my earlier outline on funding investor education.)

(d) Clarify and relax the proxy solicitation filing rules as they may apply to online sharing of insights by retail investors. The existing rules are currently having a chilling effect on those discussions. The SEC could consider whether individuals or organizations that provide voting guidance and opinions on electronic voting platforms should more clearly be designated as exempt from filing and notification requirements. Or those rules could at least be more clearly defined so that third parties know when the lines are crossed.

(e) Give informal support and encouragement for the development of some form of feed-based voting system, e.g. by proposing it in public speeches. This may help persuade various organizations to start building such a system.

(f) Consider ways of opening up the retail proxy voting process to more competition. Several worthwhile recommendations can be found in Moxy Vote’s November 19, 2009 submission at www.sec.gov/comments/s7-22-09/s72209-8.pdf.

——————

Once those tools are developed and released, then educators should launch a major campaign to encourage retail investor proxy voting. Let individuals know that voting gives us the power to hold corporate directors and managers accountable. We can vote the stock we own directly, and check the voting records of the funds we are invested in.

For now, the best education on proxy voting would be to direct retail investors to moxyvote.com and ProxyDemocracy.org.

[By the way, I am an unpaid board member of the nonprofit ProxyDemocracy, and have no business relationship with the for-profit Moxy Vote. I like them both because they are pioneering this crucial public interest function, which generates little or no revenue because of the collective action problem described in point 6(c) above.]

As reported in the summary of our subcommittee’s January 15 2010 phone meeting:

Members participating were Mellody Hobson, Mark Latham, Dallas Salisbury (subcommittee chair), and Kurt Stocker. Commission staff participating were Lori Schock, Mary Head, and Owen Donley. The following was discussed:

Proxy Education Ideas from Mark Latham

Mark reviewed ideas relating to proxy education for retail investors, based on the memo he circulated to the subcommittee earlier (attached below). Among other issues, Mark noted the need to improve the quality of voting, in addition to the quantity of retail voting. His recommendation included the utilization of a “specialization strategy” where retail investors could rely on proxy specialists and professionals. He also discussed other potential tools, including web-based initiatives. Kurt noted that the Investor as Owner subcommittee had been discussing the need for a “cleaner” channel of communications between the issuer and investor communities. The subcommittee was in general agreement both as to the importance and the need to improve retail participation in proxy voting, as well as the potential utility of an ISS-like entity for individual investors. There was not a consensus on whether better voting and communication tools were the solution, or on whether the issue should be a priority of the subcommittee or Committee as a whole, relative to issues such as financial literacy.

So I was disappointed not to get consensus support for my recommendations, but there is still plenty of hope for implementing these ideas. Further reflection and discussion may yet build some support from this subcommittee. Most of the recommendations are more within the purview of the Investor as Owner subcommittee, of which I am also a member, so I am bringing them forward there. SEC staff attend our subcommittee meetings and read our reports, so they can consider ideas even without official committee consensus. And some implementation by private sector and nonprofit organizations can proceed without needing a push from the SEC.

The above proposals are part of a broader reform agenda outlined in my article “Proxy Voting Brand Competition” at votermedia.org/publications.

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4 Comments

  1. […] Mark Latham’s proposal for “Feed-based Automated Vote Emulation” (FAVE, see Investor Education On Proxy Voting, VoterMedia Finance Blog, 1/29/2010) based on the concept of Proxy Voting Brand Competition offers […]

    Pingback by CorpGov.net » CDV vs FAVE: More Proxy Voting Options — February 16, 2010 @ 8:50 am

  2. […] excited about how this will empower individual investors — see the future steps outlined in this earlier post. Leave a […]

    Pingback by SECIAC Feb 22 Meeting Video « VoterMedia Finance Blog — March 3, 2010 @ 2:31 pm

  3. […] Related post on this blog: Investor Education on Proxy Voting […]

    Pingback by New York Times and Harvard blog on empowering retail investors « VoterMedia Finance Blog — March 5, 2010 @ 5:57 pm

  4. I’m happy to see that the term “Client Directed Voting” (CDV) is now being used for systems that would give retail investors a wide range of automated voting options (e.g. John Wilcox’s post). When the term CDV was originally coined (by Stephen Norman in 2007, I believe), only a few options were being proposed; likewise in the recent post by Zarb and Endean.

    That is why I suggested a different term (FAVE) in the post above, to distinguish a system with wider voting options. But if CDV now has this broader meaning, then I see no need for another term (FAVE).

    This growing consensus will encourage the implementation of systems to empower retail investor voting, as outlined in the articles “The Internet Will Drive Corporate Monitoring ” (2000) and “Proxy Voting Brand Reputation” (2007) at http://votermedia.org/publications.

    Comment by Mark Latham — March 25, 2010 @ 11:49 am


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