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Proxy Voting

by Charles Rotblut, CFA

Proxy Voting Splash image

Proxy ballots and the materials included with a ballot provide a key opportunity for investors. The ballots give shareholders a mechanism to express their rights as owners. The accompanying materials give details on how the company is run, including who the board members are, how executives are paid and whether conflicts of interest exist.

What Is in the Proxy Package?

Depending on the preferences you provided to your broker, you may receive notices about shareholder meetings either through a letter or package in the mail or an e-mail directing you to a Web site (an e-proxy). The contents will include a ballot, a notice of the meeting and the proxy statement.

The ballot will contain information about the shareholders’ meeting time and location. You can choose to appear at the meeting and vote in person. Alternatively, you can follow the instructions on the ballot to vote over the Web or by mailing the ballot in. If you decide not to attend the meeting, your ballot must be received by the company prior to the start of the meeting.

In addition, the notice will provide a brief overview of the proposals up for a vote and the board’s recommendations for those proposals. Each proposal should be considered based on its own merits. Furthermore, it may be in your best interest to vote against one or more of the board’s recommendations.

The proxy statement will provide relevant information for each of the proposals. The statement includes information about the independence of board members, executives’ compensation and explanations of what shareholders are being asked to approve.

What Will You Be Voting on?

Each ballot will vary by meeting. The most common items listed on the ballots are nominees for the board of directors and a proposal to ratify the firm’s accounting firm. Other items that can appear are the issuance of new shares, a request for authorization to split a stock or approval for a proposed merger. There can also be proposals to alter the corporate structure; for example, changing how board members are voted for or instituting special mechanisms such as the right for shareholders to acquire additional shares at a preset price in the event that an acquisition offer is made.

Who Can Vote for You?

You can cast your own ballot or designate a third party, such as a broker, to vote for you. Under a new SEC rule, you must provide your broker with instructions on how they should vote. A broker cannot vote for you without written instruction. The only exception is for “routine” matters such as the selection of an outside accounting firm. Most items on the proxy statement will not be routine matters.

Electing the Board of Directors

The top proposal on most proxy ballots will concern nominations for the board of the directors. The role of a company’s board of directors is to look out for the best interest of shareholders. Therefore, independence is a key trait shareholders should look for.

A brief biography of each nominee will be provided near the beginning of the proxy statement. Toward the back of the statement, you will find sections labeled with a phrase such as ‘certain relationships and related transactions’ or something similar. If a nominee is listed in one of these sections, he is less likely to be an independent voice for shareholders. Finally, look at share ownership. The more shares a director holds, the more his financial interests should be in line with those of other shareholders.

Ratifying the Accounting Firm

Ratification of the accounting firm may seem like a minor vote, but it should be given consideration and thought. A good accounting firm will ensure the financial reporting is in order. More importantly, a good firm will issue an adverse opinion or a disclaimer if they find fault with the company’s accounting policies.
Do not base your decision on whether you have heard of the firm or not. A major, well-known firm is not a guarantee that scandals will not happen and many regional firms are highly competent. What matters more is the reason why a company is changing firms. A change in accounting policies can result in the restatement of prior years’ earnings, which could impact valuation and growth estimates.

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Approving Executive Compensation

A good compensation package is large enough to attract and maintain talented executives and ties performance to goals that benefit shareholders over the long term. A quick scan of proxy statements for competing firms can provide an idea of what average pay is for the industry. (Go www.sec.gov, click on “Search for Company Filings,” type in a stock ticker and look for form DEF 14A.)

Restricted stock is preferable, though many companies award executives options. In either case, the awarding of securities should be based on measures of profitability, such as an increase in margins, net income, earnings per share or return on assets. Be cautious of the changes to option vesting plans or the repricing on option contracts; these could be made to benefit the executives, and not as an incentive to work toward raising the stock price. Often these changes will be referenced under the term “incentive plan.”

Changes to Stock Composition

A company may hold a vote that impacts the composition of shares. Such votes typically fall into one of three categories: a change in ownership interest, a change in the number of shares outstanding, or the option to offer shares in the event of an acquisition.

A change in ownership interest occurs when the company wants to raise money (new shares are issued and distributed) or wants to use existing cash or debt to buy its stock on the open market. A proposal to issue more shares is dilutive and will decrease your ownership interest. A proposal to repurchase and retire shares will increase your ownership interest.

A stock split changes the number of shares outstanding, but does not impact ownership interests. Most stock splits increase the number of shares, but reduce the price by a proportionate amount. For example, if you own 100 shares of a stock trading at $100 per share and a two-for-one split is approved, your holdings will change to 200 shares at $50 per share. Either way, your holdings are still worth $10,000. A reverse split reduces the number of shares outstanding, but increases the pro rata price each share trades at. Berkshire-Hathaway shareholders approved a positive split on the company’s class B shares earlier this year to facilitate the takeover of Burlington Northern Santa Fe. Citigroup shareholders will vote on April 20 to extend authorization for a potential reverse stock split to avoid low-price restrictions that many institutional investors have.

A company may ask shareholders to approve a measure to sell more shares at specified price in the event that an acquisition offer for the firm is made. This is commonly referred to as a “poison pill.” Though management may favor having the ability to enact such a provision, the intent is to make it harder for a would-be buyer to make an unsolicited offer.

More Information

The SEC recently launched a new section on its Web site devoted to proxies, appropriately named Spotlight on Proxy Matters (www.sec.gov/spotlight/proxymatters.shtml). The section includes information about corporate elections, voting procedures and detailed explanations of the content on a proxy ballot and proxy notice.

There are also various third-party sites devoted to proxies. For example, ProxyDemocracy.org shows the results for past meetings and ballot proposals for upcoming scheduled meetings. Moxyvote.com shows suggestions from various advocacy groups. When looking at any Web site for information or proxy voting advice, keep in the mind that the recommendation for a specific ballot initiative may not be in your best interest as a shareholder. Just as in government elections, it is important to do your own homework, stay informed and vote.


 

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


Discussion

Thomas from GA posted over 2 years ago:

Thanks for your efforts at instructing the ignorant. I appreciate it.


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