Proxy season is moving into full gear. As a shareholder, you are one of the owners of your companies, so you get to vote your proxies and weigh in on major decisions. Shareholder votes are, of course, much like public government elections, but in most cases, your vote has a bigger impact. Public government elections are one-person, one-vote1, but company elections are one-share, one-vote. Your 100 shares of General Motors’ 1.4 billion total shares are about 10x more influential than your 1 vote out of the roughly 160 million cast in the 2020 presidential election. Larger shareholders get more power. If you are fortunate enough to own 7 million General Motors (GM) shares, you could get a meeting with Mary Barra, GM’s chief executive.
Long ago, shareholders had to cast their votes in person. In response to abuses2, companies today allow shareholders to designate someone else to place their vote on their behalf (a proxy). Today, this means that shareholders can cast their vote online, by U.S. mail or by telephone. Details of the issues are outlined in proxy statements, usually found under the “Financial Information” or similar section on each company’s investor relations website.
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Voting is very easy – as simple as visiting the website of the relevant independent vote-counting firm (usually www.proxyvote.com). Simply key in the 16-digit code provided on the ballot you received by U.S. mail and click on your choices.
Many companies webcast their annual shareholder meetings to the public. One of the most popular annual meetings is held by Berkshire Hathaway. While upwards of 25,000 people make the trek to Omaha, Nebraska to attend in person, multiples of that number watch online.
The most important role of shareholders is to decide which people become or stay members of the board of directors that oversee (or govern) the company. This “governance” issue is a critical driver of the company’s strategy, its leadership quality, and the use of its capital. Boards select and directly oversee the Chief Executive Officer.
Governance (the third part of ESG investing) is a critical battleground for underperforming companies. Activist shareholders wage proxy battles to replace board members (and indirectly the CEO) by convincing shareholders to support their campaigns. Ironically, the biggest supporters of activist investors are passive index funds – as these funds often collectively hold over 20% of many companies’ shares. Indirect players in proxy battles are proxy advisory firms like Glass, Lewis & Company and Institutional Shareholder Services (ISS). These lightly regulated firms hold immense power as their advice is heavily relied upon by institutional shareholders who otherwise could be subject to lawsuits by voting against a company’s chosen slate of board candidates. The new universal proxy rule that takes effect this year, which allows shareholders to mix and match candidates nominated by the company and by activists, could change the nature of proxy battles.
A major proxy battle is brewing at DNA science company Illumina (ILMN). Activist and shareholder Carl Icahn is nominating a slate of three directors. In his proxy filing, he asserts that the board of directors made a “reckless” decision to close the Grail acquisition against the “explicit prohibition from the European Commission,” leading to the “remarkable incineration of almost $50 billion of shareholder value.” He further castigates the board for approving a “massive” 87% increase in the CEO’s pay, to $27 million. This shareholder meeting, with a yet-to-be-determined date, promises to be entertaining and illuminating.
Shareholders also approve the selection of the company’s auditors, any major acquisitions or other sizeable changes in its capital allocation, and provide a non-binding vote on executive compensation (called “say on pay”). Investors also vote on any proposals that have been put forth by shareholders. This year, proposals on “anti-ESG,” climate change and human capital management will likely be prominent.
So, this year, while many shareholders toss away their proxy votes, spend a few minutes voting yours. You own part of the company and deserve to let your views be known. And, enjoy the proxy battles – they can be better than the HBO Succession series.
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[1] Some companies, like Alphabet (GOOG) and Berkshire Hathaway (BRK.A), have two classes of shares, with one class holding super-voting power (perhaps 10 votes per share) which helps keep voting power in the hands of founders.
[2] One common tactic was to hold the shareholder meeting in a location well away from the company’s headquarters, sometimes in a remote small town. Some companies didn’t even announce the date or location, instead burying the details deep in a regulatory filing that, in those days, had to be accessed in person at the SEC offices in Washington, DC.
