November brings Election Day. But if you own stocks, you actually have voting opportunities throughout the year. Many shareholders never realize they possess this power. Even fewer understand what proxy voting means for their investments.
What is proxy voting?
What is proxy voting? Simply put, it’s how shareholders vote on company decisions without attending meetings in person. When you own shares of a company, you own a piece of that business. This ownership includes the right to vote on important matters.
The term “proxy” means someone acts on your behalf. In proxy voting, you authorize someone to cast your vote at the annual shareholder meeting. Shareholders typically vote by proxy card or online rather than attending meetings themselves.
Every share typically equals one vote. If you own 100 shares of a company, you have 100 votes. Larger shareholders have more influence, but every vote counts in close decisions.
Companies must hold annual meetings according to their bylaws and state law. Special meetings may occur for urgent matters like mergers. Before these meetings, companies send proxy materials to all shareholders of record.
Why shareholders often skip voting
Several reasons explain why shareholders ignore their voting rights. Many investors don’t know they can vote. Others feel their small holdings won’t matter. The proxy materials seem complex and time-consuming to review.
But there’s another crucial reason why numerous investors never see a ballot. If you own shares through mutual funds or ETFs, the fund manager votes for you. Investment advisors frequently retain voting authority for client accounts. You might own pieces of hundreds of companies through these vehicles. Yet you never cast a single vote.
This arrangement makes sense for fund operations. Fund managers can’t practically collect votes from thousands of shareholders for every proxy decision. However, it means millions of ultimate shareholders have no say in corporate governance.
Index funds control an increasingly large portion of public companies. The largest fund companies now hold significant voting power across the entire market. They vote according to their proxy voting policies, which may or may not align with your views.
Common items on proxy ballots
Board of director elections
Directors oversee management and make strategic decisions. Many boards have staggered terms, so shareholders vote on a few directors each year. Companies usually nominate their chosen candidates. Occasionally, activist investors nominate alternative candidates in proxy fights.
Executive and employee compensation
Say on pay votes let shareholders approve or reject executive compensation packages. While these votes are typically advisory and non-binding, strong opposition sends a message to boards. Companies also seek approval for stock option plans and employee stock purchase programs. These programs dilute existing shareholders but help companies attract talent.
Auditor ratification
Shareholders vote to approve the company’s choice of independent auditor. This accounting firm reviews financial statements for accuracy. While usually routine, auditor changes or concerns about independence may warrant attention.
Shareholder proposals
Shareholders who meet ownership thresholds can submit proposals for voting. The range of topics varies widely. Some proposals request enhanced disclosure of political contributions or lobbying activities. Others seek detailed reporting on climate risks, cybersecurity measures, or supply chain practices. Proposals might address workforce diversity metrics, human rights policies, or executive compensation structures.
Different shareholders bring different priorities to the table. Proposals might aim to limit corporate statements on social and political issues. Others push for greater transparency in environmental impact reporting. Some seek governance reforms like separating CEO and chairman roles, implementing proxy access rights, or eliminating supermajority voting requirements.
Institutional investors often submit proposals focused on board independence and accountability. Religious organizations might propose ethical investment screens or workplace policies. Free-market advocates sometimes challenge corporate positions they view as beyond business scope. Public pension funds frequently advocate for disclosure of political spending. The diversity of proposals reflects the varied perspectives among shareholders.
Each proposal includes supporting and opposing statements. The company’s board typically recommends voting against shareholder proposals. However, proposals receiving significant support often lead to policy changes even when they don’t pass. Companies increasingly negotiate with proposal sponsors to implement changes without going to a vote.
Corporate actions
Major corporate changes require shareholder approval. Mergers and acquisitions need votes from both companies’ shareholders. Stock splits, special dividends, and new share issuances also require approval. These votes directly impact the value and structure of your investment.
Surrendering your right to vote
When you buy mutual funds or ETFs, you typically surrender your proxy voting rights. The fund’s investment advisor votes on behalf of all fund shareholders. Similarly, managed accounts commonly grant voting authority to the investment advisor.
Large asset managers like Vanguard, BlackRock, and State Street now control enormous voting blocks. Through index funds alone, these firms vote trillions of dollars in shares. They’ve become the largest shareholders in many public companies.
These firms employ dedicated teams to analyze proxy proposals. Proxy advisory firms like Institutional Shareholder Services (ISS) and Glass Lewis provide research and recommendations to institutional investors. While the largest asset managers emphasize their independent decision-making processes, smaller funds often rely more heavily on these recommendations.
Fund companies publish proxy voting policies explaining their approach. They also disclose their actual votes annually through filings with the SEC. However, these disclosures come months after the votes occur.
The concentration of voting power raises questions. Fund managers vote shares they don’t economically own. Their incentives may differ from underlying investors. They might prioritize business relationships over governance principles. Or they might pursue objectives beyond investment returns.
Some argue this system works well. Professional investors have resources to analyze proposals properly. They can engage with management behind the scenes. Coordinated voting by large shareholders may improve corporate governance.
Others worry about the implications. A small number of institutions now influence countless public companies. Their voting policies shape corporate behavior across the economy. Individual investors have little input in this process.
Finding information before voting
Making informed proxy voting decisions requires research. Fortunately, companies must provide detailed information to shareholders.
The proxy statement (Form DEF 14A) contains the official voting materials. This document explains each proposal and provides the board’s recommendations. It includes executive compensation details, director biographies, and shareholder proposal arguments. Companies file these statements with the SEC several weeks before meetings.
Annual reports provide broader context about company performance and strategy. The 10-K filing contains detailed financial information and risk disclosures. Recent 8-K filings announce major events between annual reports.
Several resources help shareholders research proxy votes. The SEC’s EDGAR database contains all company filings. Company investor relations websites often highlight key voting items. Proxy advisory firms publish some research publicly, though detailed reports require subscriptions.
Financial news outlets cover significant proxy battles and controversial proposals. Industry associations provide perspectives on proposals affecting their sectors. Nonprofit organizations publish voting guides aligned with various causes.
How to cast your ballot
If you own shares directly, voting is straightforward. Companies send proxy materials to all shareholders of record before meetings. This package includes the proxy card listing all proposals.
Brokerages very commonly deliver proxy materials electronically now. You might receive an email when materials become available. Log into your account to review documents and vote online. The system tracks your shares and submits votes electronically.
Paper proxy cards still exist for those who prefer them. Mark your choices and return the card by mail. The prepaid envelope is included. Phone voting is also available using the control number on your proxy card.
You can change your vote until the deadline, typically the day before the meeting. The latest vote submitted counts. If you don’t vote, your shares typically aren’t counted, though brokers can vote on routine matters for retail shareholders who don’t respond.
Attending the annual meeting in person is another option. You can vote directly at the meeting. Many companies now offer virtual attendance options as well. However, meetings often occur during business hours in distant locations.
The process differs if you own shares through a managed account. Some advisors offer clients the option to direct proxy votes themselves. At Magnifina, we believe shareholders should maintain this right if they choose. Our proxy voting policy is available upon request for clients and prospects who want to understand our approach when we do vote on behalf of clients.
Taking control of your investments
Proxy voting represents a fundamental shareholder right. Yet the current system means countless investors never exercise this power. Understanding what proxy voting is helps you make better investment decisions.
If you own individual stocks, read those proxy materials. Your votes influence companies you own. Even small shareholders can impact close votes.
Some investors prefer the convenience of delegated voting. Others want direct control over these decisions. Neither approach is universally correct. But every investor should understand the choice they’re making.
The companies you own shape the economy and society. Board composition affects corporate strategy. Executive compensation influences business priorities. Shareholder proposals address environmental practices, social policies, and governance structures.
Your investment approach should align with your financial goals and values. This alignment includes how your shares get voted. Whether you vote directly or delegate to others, understanding the process helps you invest with intention.
Ready to take a more active role in your investments? Start here with our 4-question survey to see if we’re a good fit for your financial goals.
