Shareholder voting
We have talked a few times recently about a stylized fact of US public companies, which is that retail shareholders don’t vote. When a company has its annual meeting and sends out proxy statements and asks its shareholders to vote on questions like “should our board of directors be re-elected” and “do you approve of management’s compensation plan” and “do you approve of our audit firm” and “should we write a report about our greenhouse gas emissions,” its ordinary individual shareholders throw those proxy statements in the garbage and do not vote on those questions.
One reason that retail shareholders don’t vote is that it is hard to reach them: They have busy lives, they get a lot of junk mail, they throw it all away. Plus the company itself generally won’t know who its retail shareholders are, and will have to communicate using a multi-tiered indirect approach (sending proxies to brokers who send them to shareholders, etc.) that doesn’t reach shareholders very efficiently.
Another reason that retail shareholders don’t vote is that it would be an insane use of their time. If you own shares in 50 companies, and you want to vote those shares in an informed way, you have to read 50 proxy statements each year. Each proxy might be 50 to 100 pages long, so you are talking about thousands of pages of reading. Here is Exxon Mobil Corp.’s proxy statement for its 2022 annual meeting, which runs to 86 pages. Shareholders have to vote to re-elect 11 members of the board of directors. They have to vote to ratify Exxon’s independent auditors and to approve its executive compensation. And then there are seven proposals that shareholders have made — some of the summaries on the proxy card are “remove executive perquisites,” “report on scenario analysis,” “report on plastic production” — that also require votes. So just for Exxon you need to come to a view on 20 different proposals. You have 49 more proxies to read.
None of these votes are binding. If a majority of shareholders vote against a public company’s director in an ordinary uncontested vote, that director will probably have to submit a resignation, but the board generally has the option to reject the resignation: The shareholder vote itself is not enough to remove that director. The auditor ratification and executive compensation votes are nonbinding; it is embarrassing for the company to lose them but has no obvious immediate effect. The shareholder proposals are especially nonbinding: They generally call for the company to write reports about things that the shareholders don’t like (plastic production, etc.). Even if a majority of shareholders vote for these proposals, the company is not required to write the reports. Even if it does write the reports, it doesn’t have to do anything about them. There is not really a mechanism for the shareholders to say “stop producing plastics” and make the company actually do it.
So if you are a shareholder and you hold 100 shares of stock of Exxon, you might reasonably think: “None of this makes any difference to me at all. I just want my stock to go up, and none of this stuff will make my stock go up or down no matter how I vote. I have better things to do.” So you throw out the proxy.
Now, to be fair, sometimes there are important binding votes. If a public company agrees to be acquired in a merger, its shareholders will have to vote to approve the merger; if it doesn’t get enough votes then the merger won’t happen. If the company is trading at $10 and the merger price is $15, and you don’t vote and the merger fails, you will miss out on $5 per share. Sometimes companies need shareholder approval to, say, issue more stock, or extend their deadline to do a deal, and getting or not getting that approval will make a real economic difference. Sometimes an activist will launch a proxy fight, which will lead to a binding shareholder vote on two different slates of possible board members with different strategies. In fact this happened at Exxon in 2021: An activist ran a proxy fight to put new directors on the board to try to move the company toward renewables faster; the activist won.
If you get a proxy statement like that, you might want to vote your shares, because your vote could have an impact on the value of your stock. But your vote won’t have that much of an impact, because you hold 100 shares and there are billions of shares. In Exxon’s proxy fight last year, there were 16 candidates, and the 12 candidates who got the most votes were elected to the board. The person in 12th place (the lowest-ranked winner) got 1,174,445,208 votes; the person in 13th place (the top loser) got 1,173,545,328. That’s a difference of 899,880 shares out of almost 1.2 billion, or about 0.08%, an incredibly close and hard-fought proxy fight. Also though that margin is like 9,000 times your little block of 100 shares. Your vote wouldn’t have mattered. And that’s about as close as proxy fights realistically get. Even in this hard-fought binding contest about the strategic direction of Exxon, it was still a waste of time for you to vote.
Also, even if you thought “well I’ll vote on things like mergers and proxy fights where it might matter, but not on uncontested director elections where it doesn’t,” you’d have a problem, which is that you’d have to pay attention and find out. What, you’re going to read every 80-page proxy statement to see if there’s anything good in it? A much easier heuristic is: “Most votes don’t matter, and even on the ones that do matter my vote is unlikely to be decisive, so I am going to throw out all the proxy statements without reading them.”
This is just obvious normal stuff. If you are an individual shareholder, what you do is (1) buy stock in companies that you like, (2) not buy stock in companies that you don’t like, and (3) if you start to dislike a company whose stock you own, you sell it. A fourth approach of buying stock in companies and trying to change them via shareholder voting would be extremely odd, which is why very few retail investors do it. [1]
If you are the gigantic institutional asset manager BlackRock Inc., your calculation is very different, in a number of ways:
- You own millions of shares of every public company, so your vote, on contested binding issues, matters. You might very well be the deciding vote on a merger or a proxy fight, which might make a material difference to the value of your shares.
- Even on the nonbinding stuff, you will care, because you own every public company and you are playing a long game. You might decide something like “our companies should be reducing greenhouse gas emissions,” and then you might think about how to make them do that. There are approaches that are nonbinding but persuasive. (You might have quiet one-on-one chats with the company’s managers about emissions.) But as a huge shareholder there are also approaches that are binding. (You might support a proxy fight, as BlackRock apparently did at Exxon, to throw out directors who don’t do what you want.) And then everything else sort of exists in the shadow of those binding approaches. If you are BlackRock and you think a company pollutes too much, you might vote your shares in support of a nonbinding shareholder resolution saying “the company should write a report about pollution.” If that resolution gets majority support — or even a large minority — that will be embarrassing for the directors. If they continue to pollute too much, you might vote no on executive pay or director re-election: again nonbinding, but even more embarrassing, and also a signal that next year you might support an activist proxy fight and actually throw out the directors. All of this stuff is subtle and coded, but the point is that the shareholder vote is one tool that BlackRock has to express its desires, and BlackRock’s desires matter a lot to public-company executives because BlackRock owns like 8% of their stock.
- Voting on the nonbinding stuff might have some marketing value. “We care about the environment and pressure companies to do better, as you can see from our voting record,” you might want to be able to say, in marketing your funds to potential investors. [2] Environmental, social and governance investing is hot (though controversial) now, and voting on shareholder proposals is a way to signal your ESG commitments.
- Because you own trillions of dollars of stock, your bar for economic relevance is in some sense lower. If you think that writing a report on greenhouse gas emissions might add 0.01% to the value of Exxon’s stock, well, BlackRock owns like $24 billion of Exxon stock, so adding 0.01% would be worth $2.4 million to BlackRock’s investors. Worth an afternoon of someone’s time reading a proxy. But if you’re an individual with 100 shares, that 0.01% is worth about $0.92 to you.
- Unlike retail shareholders, you can’t just sell shares in the companies you don’t like: A lot of your money is in index funds, which are mandated to hold all the companies. So it is rational to try to pressure them with voting rather than just dumping their stocks when they do things you don’t like.
- Your whole job is paying attention to the important issues at the companies you invest in, unlike a retail investor who has a day job and has to read proxy statements in the evening after a long day at work. You are a fiduciary for your clients, so you have to do a good and careful job of paying attention.
- You have thousands of employees, so you can have a couple of them specialize in reading proxies. They’ll get good at it, they’ll know what to look for, so they can use their time efficiently rather than reading every 80-page proxy cover to cover with a pen in their hands. And because you care mostly about systemic issues, they can develop pretty good rules of thumb about what sorts of proposals they should and should not vote for. [3]
- Just technologically, the voting systems for institutional investors are better than those for retail investors. You can subscribe to a proxy-voting service that lets you make all your voting decisions through one online interface, so you are not like literally clipping out proxy cards and mailing them back. (Sometimes this gets hilariously messed up, but not often.)
And so in fact BlackRock seems to devote a fair amount of time and thought to voting its shares. And while what I wrote above is most applicable to BlackRock, you could probably substitute in the names of a dozen or so big institutional investors and say many similar things. And there are activist hedge funds who make a business of buying concentrated positions in companies and using their voting power (and proxy fights, etc.) to push for change; obviously they care a lot about voting.
But there are a whole lot of institutional investors, asset managers and mutual funds who are in the business of investing in stocks professionally but who are not BlackRock. If you are a mutual-fund manager with $1 billion under management, you might own on the order of thousands of shares of dozens of companies. Probably you employ multiple professionals to analyze companies and decide which stocks to buy. But in terms of voting your shares, you are perhaps much closer to a retail investor than you are to BlackRock:
- Your thousands of shares in any company are vanishingly unlikely to be decisive.
- You do not have much soft power to influence issuers’ decisions, so your vote has no symbolic effect.
- There might be some marketing value to your vote — even small investment managers can raise money by touting their ESG or anti-ESG voting record — but if you are just a normal we-try-to-buy-good-stocks manager there’s probably not much.
- You don’t own trillions of dollars of stock, so your bar for economic relevance is high.
- You probably buy stocks you like and avoid ones you don’t like: Your “voting” on a company, in a real sense, is buying its stock, not voting your shares.
- Yes fine your whole job is paying attention to companies. In this you are like BlackRock. You do have some professional fiduciary obligation to know what is going on.
- But you have only a few employees, and their time is better spent on picking stocks to buy or sell than it is on voting.
- Technologically, you too subscribe to a proxy-voting service, so it is administratively easy for you to vote. So you should probably vote your shares. You just shouldn’t necessarily think that hard about it.
That last point is awkward. It is easy for a small institutional investor to vote all its shares in all the companies it owns: You can just subscribe to a proxy-voting service, give them a general rule for how you want to vote, and then they will automatically vote your shares for you. You could have a general blanket rule like “always vote to re-elect directors, ratify auditors and executive pay, and reject any shareholder proposals about writing weird reports.” (Or “always vote for those reports,” whatever.) And then you could override your general rule if there is some controversy that you particularly care about, or if you are particularly displeased with some company’s managers, or whatever.
Or maybe you would never override that general rule. Maybe it would never be worth it to actually think about how to vote your shares. At a meta-level, maybe it’s not worth it to think about when it might be worth it to think about how to vote your shares. “The odds of us caring are so low that we should just throw out all the proxies without reading them to find out if we care,” might be a rational approach. [4]
Rational but embarrassing. Here’s a US Securities and Exchange Commission enforcement action from last week:
The Securities and Exchange Commission today announced settled charges against registered investment adviser, Toews Corporation (“Toews”), for proxy votes on behalf of clients without taking any steps to determine whether the votes were in the clients’ best interests, and for failing to implement policies and procedures reasonably designed to ensure it voted client securities in the best interests of its clients.
The SEC’s order finds that from January 2017 through January 2022, Toews directed a third-party service provider it engaged to cast proxy votes on behalf of registered investment companies (“RICs”) Toews managed to always vote in favor of proposals put forth by the issuers’ management and against any shareholder proposals. According to the SEC’s order, in connection with over two hundred shareholder meetings, Toews caused the third-party service provider to vote the RICs’ securities pursuant to this standing instruction without exception and without any review by Toews of the proxy materials associated with those votes. Toews did not otherwise take steps to determine whether the votes were cast in the RICs’ best interests and failed to implement policies and procedures reasonably designed to ensure that Toews voted proxies in its clients’ best interests, as required by the Investment Advisers Act of 1940.
For five years, Toews’s proxy voting was on autopilot: It always automatically voted for whatever management wanted, without reading the proxy. It agreed to stop doing that and paid a $150,000 fine. On the one hand: Sure, yes, it feels unprofessional for a professional money manager to vote its clients’ shares automatically without ever giving any thought to any individual vote. On the other hand: It feels unprofessional, but it is obviously rational?
I guess if you’re the SEC you can’t say that, though. You can’t be like “okay fine shareholder voting is mostly a waste of time and nobody should read proxy statements,” since you’re in the business of regulating proxy statements, and since you’re regularly adding disclosure and voting requirements to them. (The fact that shareholders vote on executive pay is the result of a 2011 SEC rule.) More broadly, the SEC is fundamentally a disclosure regulator, and it is sort of institutionally difficult for the SEC to say that a lot of the disclosure it requires isn’t worth reading.
Difficult but not impossible! The two Republican SEC commissioners, Hester Peirce and Mark Uyeda, dissented from the Toews enforcement action and said, sure, yeah, it’s fine, don’t read the proxy. “Importantly,” they write, “the Order does not make any findings that the adviser’s clients would have been financially better off had the adviser cast any of the votes at issue in an alternative manner”: Automatic voting feels unprofessional, but it’s just vanishingly unlikely that it actually cost Toews’s clients any money. And:
The cost of reviewing and analyzing individual matters may outweigh any corresponding increase in the value of the issuers’ securities. …
Costs incurred by smaller investment advisers to review and analyze each matter submitted for a shareholder vote likely will be passed on to clients. Toews is not a large adviser with hundreds of employees and trillions under management. According to its most recent Form ADV, Toews reported about $1.25 billion in assets under management and 17 employees who perform investment advisory functions. Given that the majority of investment advisers fall within this category, incorrect implications drawn from the Order potentially could have wide-ranging consequences.
That's right: The pretty clear implication of this order is that, if you are a professional money manager, the SEC expects you to read companies’ proxy statements before voting your shares at their annual meetings. And Peirce and Uyeda think that’s probably a waste of time. [5] They might be right, but it’s a weird thing to say on SEC letterhead.
[1] Not none: There are people who buy small blocks of stock, submit shareholder proposals, go to annual meetings and generally try to make trouble at public companies. These people are generally committed activists and/or cranks, though, not regular shareholders.
[2] Empirically BlackRock often gets criticized for its voting record. Also there are countervailing considerations where you might want to go to *corporate pension managers* and say “oh we always vote with management, we’re very nice.” Still the abstract consideration seems valid, and BlackRock does market its voting record.
[3] Also if you are an institutional manager you probably subscribe to proxy advisory services which to some extent outsource this work, though there are various controversies there and you might not want to outsource it too much.
[4] To be clear, you should probably read the proxies, because they have information that might inform your buying and selling decisions. You just shouldn’t worry about voting.
[5] I assume that there is also a sort of covert fight over ESG going on here: The three majority SEC commissioners think that investment managers should pay more attention to voting on shareholder proposals because that will probably promote more ESG goals, while the two Republicans think managers should pay less attention to voting because that will probably reduce the focus on ESG. I am not sure that that’s true, though; Vivek Ramaswamy of Strive Asset Management has been pushing anti-ESG through shareholder pressure, and you could imagine in a couple of years shareholder proposals *often* being a tool for shareholders to push back against managers who they think are too “woke” or too committed to ESG.
