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Bruce W. Kaser, CFA
By
May 20, 2019

What is Proxy Voting and Why Does It Matter?

It’s mid-May and proxy season has arrived. Holders of individual stocks have been receiving documents with cryptic instructions from their companies, and in some cases blue and white “Dear Fellow Shareholder” pamphlets urging them to vote for or against some proposals.

 

Many investors are familiar with proxies and can quickly complete the voting process. But, for other investors, this may all be new. So, what are proxies, and why do they matter?

 

close up of  a ballot box and casting vote on white background

  

Proxy voting is essentially absentee voting

 

For most companies, shareholders get one vote for every share they own. While it is possible to vote these shares in person (Berkshire Hathaway has a legendary annual meeting with throngs of shareholders attending), few people actually go to annual shareholder meetings. To cast their votes, shareholders can send in an absentee ballot, or proxy. The term “proxy” is used because technically the shareholders are authorizing someone else, usually the proxy agent, to vote in a specified way.

 

Proxy voting is how you help decide who runs your company

 

Shareholders are the legal owners of public companies. As such, they choose who sits on the board of directors, who then appoint and oversee the company’s CEO and other senior management. This oversight, or governance, is critical to how the company is led and how well it operates. Shareholders also have the right to vote on other major decisions, like changing the company’s by-laws and whether to undertake major actions like a large acquisition or selling the company.

 

What issues are on the proxy ballots?

There are a number of issues that shareholders are expected to vote on. Listed below are five prominent ballot issues:

Board Member Elections

The most common and most important ballot item is the election of members of the board of directors. In many cases, the entire board of directors is up for re-election each year, so shareholders get to vote on every board member/candidate. Unlike political elections, however, the candidates on the ballot are usually only those that are selected by the company. This leaves shareholders with the option of only voting “for” or “against” each of these candidates.

In some cases, an activist investor will campaign for their own slate of directors. Perhaps the most famous activist campaign was Darden Restaurant’s 2014 proxy fight led by activist investor Starboard Value, who won shareholder support for an entirely new board of directors.

Independent Auditor Approval

Another common ballot issue is approving (called “ratification”) the company’s independent auditor. This seemingly trivial matter can become a contested issue when the company’s financial statements appear to hide weak results or the company has had repetitive accounting issues.

In General Electric’s 2018 proxy vote, investors expressed considerable doubt about the merits of keeping long-time (109 years) auditor KPMG. The accounting firm was seen as too complacent over weak disclosures regarding GE’s declining cash flows, which better auditing and reporting may have illustrated more clearly.

Executive Compensation Plans

The Dodd-Frank Act requires shareholders to vote on executive compensation plans. While these “Say on Pay” votes are non-binding and may not occur every year, the company’s board can be pressured to keep executive pay to reasonable levels due to this vote.

By-Laws Changes and Major Corporate Actions

Managements may also be required to seek shareholder approval for changes to the company’s by-laws (the rules under which a company must operate), permission to issue additional shares, undertake a major acquisition or sell the company.

Shareholder-Led Proposals

Shareholders may also put issues on the ballot. In last year’s proxy season, the most common shareholder proposals sought to eliminate classified boards (where only some of the board is elected each year), adopt a majority vote for electing directors, and eliminate super-majority requirements for approvals. Other proposals can range in quality from ‘common-sense’ to ‘questionable’.

 

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How does one actually vote their proxies?

 

Most proxies can be voted on-line, although for some companies they can also be mailed-in or even phoned-in. The instructions sheet can appear complicated but the process can become easy to follow after one’s first voting experience. For investors owning shares of many companies, it often is possible to cast proxies for many companies in a single sitting.

Shareholders will want to review the proxy materials prior to voting. These materials typically include the Annual Report (which is usually combined with the 10-K filing) and the Proxy Statement. The Proxy Statement provides details on all the ballot items, including biographies of board candidates.

 

Do small shareholders’ votes really matter?

 

Yes, they matter. Just as in political elections, every vote can make a difference. In the highly contested and now famous October 2017 proxy contest between Proctor & Gamble (PG) and activist Nelson Peltz of Trian Fund Management, in which a record $60 million was spent in a proxy war, the difference between maintaining the company’s status quo and declaring victory for the activist was a tiny 6.2 million votes out of 2.5 billion total votes. If a tiny 0.2% fraction of shareholders voted differently, the activist would have won.

The research and voting process helps investors understand more about their company and its leaders. This increased level of engagement can help investors stay with a stock when the near-term share price moves in the wrong direction, which frequently happens early in a turnaround.

Casting a proxy vote is the shareholder’s voice. So, investors will want to vote all of their proxies, every time.

What are some voting strategies?

 

The most informed approach is to read through the Annual Report and Proxy Statement, understand the board candidates’ merits and each of the ballot issues, and vote accordingly.

For many investors, this can be time-consuming and overly complex. To shorten the process, investors can use one of several alternative strategies. Some of these strategies are aided by the three boxes next to each ballot item that indicate what vote the board recommends (“For”, “Against” and “Abstain”), and include:

 

1) Vote as the board recommends on all items – this strategy provides strong support for the board. If you think the board and the management team they oversee are doing a good job, and the stock is doing well, this might be a good option.

 

2) Vote against (or “withhold” support from) the board’s recommendation on all items – this sends the message that you find the current strategy and results unacceptable.

 

3) Vote according to the recommendations of proxy voting advisory services – two companies (ISS and Glass Lewis) provide recommendations to institutional investors on proxy votes. In contested issues, these recommendations are usually made public in advance of the voting deadline.

 

Our next proxy voting blog will explore some of these issues further and discuss the role of activists and ETFs in the proxy process.

Kind regards,

Bruce Kaser, CFA

Head of Equity Research, The Turnaround Letter

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It’s mid-May and proxy season has arrived. Holders of individual stocks have been receiving documents with cryptic instructions from their companies, and in some cases blue and white “Dear Fellow Shareholder” pamphlets urging them to vote for or against some proposals.