Don’t Forget the Little Guys

Proxy season is upon us once again.  Here’s an important note of caution to public companies:  Ignore the little shareholders only at your peril!

The effort to save money, combined with the notion that only the institutional shareholders influence elections, has result in recent years in many companies putting their annual report and proxy materials online.  The only communication shareholders get is a piece of paper in the mail telling them how to access this information and how to vote.  For non-institutional shareholders, it is more likely than not that they won’t vote.

For any issues that require a majority of the vote, every vote counts.  The push for majority voting means that even in uncontested elections, a director can lose her or his seat without a majority of votes.  Couple majority voting with (a) shareholders’ ability to leverage their voting interests through borrowed shares, (b) the loss of the broker vote for election of directors, and (c) the influence of proxy advisory firms, particularly RiskMetrics, and you can have trouble – big time!

Do the arithmetic.  The broker vote (e.g., brokers voting shares, typically for management, on behalf of their clients who did not provide voting instructions) is approximately 10-15% for many companies.  No broker vote means that getting a majority will require more than 50 percent of total shares minus the 10-15% that brokers would have voted.  Historically, that vote would have gone to management, so not only have the numbers of votes to be cast changed, but also the share that management’s proposals or slate would receive.  In addition, RiskMetrics’s and other advisors’ can easily influence another 25% of the vote.

So, if we begin with 100% of the vote and lop off 10% for the lost broker vote, a dissident or someone dissatisfied with the company needs to get only 50% (plus at least one additional vote) of 90% of the remaining vote – e.g., 45% of the total possible vote.  If the advisory firms take a position against management, subtract from that 45%, the potential loss of the advisory firms’ recommendations – e.g., another 25% – and any challenger needs to have just an additional 20% of the total shareholder vote.  Borrowed shares can easily bridge that gap.

In these situations getting a majority means every vote counts.  Even if a company’s individual voting base is only 10% of the company, that can be the difference between winning and losing.

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