Make Your Vote Count

Activist shareholders, regulators, and other corporate aficionados are urging directors to meet with,  listen to, and get input from their company’s long-term shareholders.  The idea is that in this way boards will be more responsive to shareholder concerns and shareholders will be more supportive of boards.  That’s an excellent concept and one which we support, but to make it effective investors need to ensure that their views are reflected in their votes as shareholders. Some institutions like CalPERS and CalSTERS vote their policies and opinions, but some institutions are allowing their input to be derailed in the voting process.

The OECD Steering Group on Corporate Governance points out in its paper entitled Corporate Governance and the Financial Crisis that “The equity share of institutional investors continues to increase but their voting behavior suggests that they can have important conflicts of interest.  Many institutional investors are still not playing an active informed role and when compelled to vote the reaction often appears to be mechanical.” The problem arises because asset owners sometimes allow asset managers and proxy advisors to determine whether and how votes are cast, and they all have different interests.

Asset owners like pension funds often have a long-term perspective because they themselves have long-term obligations.  However, they may have a shorter-term perspective with respective voting shares.  By loaning shares, shareowners and asset managers working on their behalf can reap substantial fees immediately, but potentially they do so at the cost of giving up their voting rights.

Proxy advisors, whom many asset owners follow mechanically, have their own conflicts. They are supposed to give objective advice to asset owners and asset managers as to how to vote their shares in corporations, but they also market their advisory services to the same corporations.   In doing so, they negate any hint of objectivity in evaluating companies they wish to have as clients.

Ideally, companies should listen to and build relationships with shareowners.  At the same time they should insist that their shares, whether loaned or managed by another party, must vote the shares in accordance with the owners’ policies.

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