Perhaps the most fundamental structure for investors to make their voices heard by corporations is shareholder voting. Public companies hold annual general meetings that any shareholder is entitled to attend; in the lead-up to these meetings, a series of resolutions is distributed, on which each shareholder is entitled to vote. Proxy voting allows investors to cast these votes in advance. But even for the engaged investor, this seemingly straightforward exercise can quickly lead down a rabbit hole of corporate jargon and regulatory language, leaving a host of unanswered questions about the context and impact of key votes.
At Prentiss Smith & Co, we help address this challenge by optionally voting all shares on behalf of our clients (an option most clients take). This is not a responsibility we take lightly. In fact, we believe our experience researching and understanding shareholder resolutions is an important opportunity for us to add value for clients, one that helps us deliver on the promise of socially responsible investing.
A few weeks to a few days before a company’s annual general meeting, we typically receive a proxy notice. Almost every notice will include at least three core resolutions up for a vote: the election (or re-election) of members of the Board of Directors; an advisory-only “say on pay” vote on executive compensation (mandated by federal legislation passed in the wake of the 2008 financial crisis); and a vote on the company’s audit firm. Each of these resolutions is typically accompanied by some background information, although we often look at a company’s website, its annual SEC 10-K filing, or other sources to help round out the picture.
While these core resolutions may not sound like impact opportunities, even here there are in fact avenues to express our values through our votes. For instance, we believe that diverse company leadership can produce better business outcomes and, ultimately, a more equitable world. So we always look at the number of women on the board of directors and, for US companies in particular, whether ethnic and cultural minorities are represented. If the board’s makeup is clearly not reflective of the community/ies where it does business, we may vote against non-diverse board members with less relevant experience, those who have already served long terms, those who have led other companies with poor ESG records, or those who are outside CEOs or serve on multiple other boards. We typically endeavor to cast these “no” votes to at least the threshold where we feel the company would benefit by replacing these board members with newer, more diverse directors.
At times the impact opportunities presented by proxy votes relate to governance and financial structures. On classified boards, for instance, directors do not sit for re-election each year. We generally vote against directors on classified boards, and when given the opportunity, we vote to de-classify boards (since a declassified board gives shareholders the opportunity to more readily vote in new leadership when needed). The vote on the audit firm can be a chance to reinforce fiscal responsibility, for instance by voting against an audit firm that has other contracts with the company (which could result in conflicts of interest and/or wasteful fees).
But of the core resolutions, the so-called “say on pay” vote provides perhaps the clearest opportunity for us as shareholders to vote our values. While the results are not binding on companies, if a high number of shareholders vote against a company’s executive compensation plan, it sends a definite message that compensation is out of line with company performance and/or reasonable expectations. Reporting requirements passed in the wake of the 2008 financial crisis–including the requirement to report the ratio of CEO pay to median employee pay–provide an especially meaningful level of transparency. We typically start with this reporting and take our own analysis several steps further, in an effort to understand how much of a company’s executive pay is truly at risk. While we are not categorically opposed to high levels of compensation, we insist that pay is truly linked to performance, and frequently use our “say on pay” proxy votes to protest the egregious levels of guaranteed pay received by the CEOs of many of the world’s companies.
Beyond these core resolutions, the annual meetings of large companies in particular can present a range of complex and interesting issues up for vote. Many of these resolutions are written by shareholders themselves; sometimes they relate to issues our clients care deeply about, such as climate risk, data privacy, or workplace harassment. When these resolutions are thoughtfully planned and written, we’re always excited to vote directly for companies to take action on values we see as paramount. In fact, if you follow our updates, it may not be long before you see us highlight our own involvement with such resolutions. In the meantime, we continue to engage with companies directly and vote all client shares in the manner we think best supports the changes we collectively want to see in corporations, in our communities, and in the world.
