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LeadershipCommentary

Shareholders: Don’t give away your voting rights

By
Eleanor Bloxham
Eleanor Bloxham
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By
Eleanor Bloxham
Eleanor Bloxham
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December 16, 2014, 5:00 AM ET
voting ballot box
One Man, One VotePhotograph by FPG/Hulton Archive/Getty Images
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A new Congress will begin session in Washington come January—and whether or not you are happy with the results, you have plenty of opportunities to make your voice heard before the next round of elections.

Corporate voting season is already well underway behind the scenes, and, actions you take in the run-up and during the elections could be just as important as the mid-term election votes cast in November.

U.S. investors will likely have more than usual to weigh in on this spring, as early reports like one by law firm Schulte Roth & Zabel indicate that more proposals will be up for a vote than in previous years. Yet individual shareholder participation is often low. Less than 30% of shareholders voted their shares this year, according to voting administrator Broadridge.

If you own shares in a broker-managed account, you have most likely given up your voting rights to your broker. And in almost every case, brokers vote strictly along party lines, for management, on all your shares.

But perhaps you care about LGBT issues and you’d like to see companies do a better job outlining antidiscrimination policies based on sexual orientation. If your broker votes your shares, it’s a near certainty they will support the status quo instead.

Do you care about climate change and want companies to think about this and disclose more information about the environmental impact of their activities? Your broker will likely vote your shares against those interests. Similarly, if you’d like companies to come clean on all their lobbying and political spending, your broker will likely vote against that too.

If any of these issues matter to you, there is something you can do. Just contact your broker and let her know that you want to vote your own shares in your managed account going forward.

If you own shares in a mutual fund directly or through your 401(k) plan, votes for the stocks in those funds are cast by the investment manager. But that doesn’t mean you lack options. Mutual funds publish their voting guidelines on their websites and the SEC has filings showing their voting records, the real yardstick to gauge what they are up to. As an informed investor, it makes sense to consider mutual fund voting records when making investment decisions. And if you do not like the choice of mutual funds in your 401(k) plan, you can and should ask for alternatives.

You may be surprised by how different mutual funds vote. If, for example, you are invested in the Vanguard Total Stock market index fund, you’ll find they voted against separating the CEO and chair positions in just about every election except when management said they wanted it (last year that was Occidental). The fund did not vote in favor of climate change reports or reports disclosing lobbying or political spending from companies. (For some companies, the fund voted against them and in other cases they abstained.) The fund voted for sexual orientation antidiscrimination policies, except in the case of Exxon.

In response to a request for comment on the fund manager’s inconsistent voting decisions, a Vanguard spokesperson wrote via email, “It’s our policy not to talk about individual securities or individual votes.” This lack of transparency is a cause for concern.

As with all mutual fund companies, Vanguard must be careful to avoid the appearance of conflicts of interest when a company like Exxon may be a current or potential customer, for example, for the corporation’s employee benefit plans. Vanguard’s spokesperson said that the company has a “clear separation between the proxy voting and client relationship functions.” The proxy voting group is supervised by a committee of senior executives who if “he or she might have a conflict of interest regarding a proxy vote, that member must recuse himself or herself from the committee meeting at which the matter is addressed and not participate in the voting decision.” That is a weak control.

If Vanguard’s mish-mash of voting does not comport with your beliefs, you can take action. You can let the fund company know why you think the issues raised in certain proposals are important to a company’s long-term health.

For example, this year, for the first time ever, there will be an opportunity at 75 companies to vote on proposals to allow more than one slate of directors on the ballot. Would you like to see these companies offer the choice of more than one slate? Let Vanguard know.

You could also find alternative funds with voting patterns that align with your values. For example, if you find boards composed of just one gender unseemly, Pax World votes against those director slates and has been encouraging other investors to do so as well. In that way and others, Pax uses more discretion (and more “no” votes) in their evaluation of director candidates than, say, the Vanguard funds do. Pax also votes for climate change reports, lobbying and political spending disclosure, and independent chairs. But be careful, some of the funds under its ESG portfolio, for example, have separate managers “responsible for voting the proxies of their respective mutual funds or portfolios, and their proxy voting policies may differ from Pax World’s policies,” a Pax World spokesperson told me.

While Vanguard’s voting represents old school thinking (i.e. that attention to some of these issues doesn’t matter to long-term valuation and is therefore outside their fiduciary duties to clients), that view runs counter to modern valuation principles in recently published academic research (and in my book, Economic Value Management). Votes on issues like CEO pay, for example, matter because those pay programs can hurt a company’s long-term prospects, foment bubbles and recessions, demotivate employees, and harm the economy by increasing inequality.

While some suggest you can vote with your feet if you don’t like a company’s behavior, if you are going to do index investing, you have effectively removed that arrow from your quiver. And why not take the opportunity to make a good company even better?

Other resources besides fund websites and SEC filings can be helpful in finding fund managers that align with your values. Jackie Cook, founder of Fund Votes, provides regular reports on political spending and other votes by mutual funds. The AFL-CIO tracks fund votes on CEO pay and provides useful comparisons of fund managers.

Voting makes a difference. Votes for shareholder proposals and against company directors prompt board members to take notice and change their behavior. Sure, we could choose to enact more and more laws to make companies toe the line, but do you think the new Congress and regulators would get it right?

Taking no part in democratic or corporate governance is akin to shrugging off the power we have to act for the common good while ceding control to others who may have selfish motives. Voting your shares may seem like a slog with small progress made inch by inch. But in a recent webinar, Jacob Goldenberg, author of Inside the Box: A Proven System of Creativity for Breakthrough Results, argued that most innovation actually occurs through incremental change. Collectively, investors wield power to shape a better future.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com), an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and is the author of two books on corporate governance and valuation.

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By Eleanor Bloxham
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