PROXY VOTING 101

Publicly traded companies are required by law to report to share-holders. They do this through a variety of means, most notably by numerous SEC filings, including an annual report, and by inviting shareholders to an annual meeting. Prior to the annual meeting, shareholders are sent documents known as proxy statements that include details about the annual meeting; ownership, board structure, and executive compensation; and other issues that will be voted on at the meeting.

The annual meeting and proxy statement provide a formal communication channel between corporate management and shareholders. At a minimum, the proxy statement asks investors to ratify issues placed on the proxy by management, such as the election of directors, the auditor report, and CEO pay package. Management may also seek approval of more complex and controversial issues, such as mergers and acquisitions, stock option plans, or resolutions brought by qualified shareholders on a variety of issues.

US Securities and Exchange Commission (SEC) rules allow shareholders to file proposals with companies on corporate environmental, social, and governance issues. The requirements to file a proposal are relatively simple. Any shareholder who owns $2,000 worth of company stock and has held it for one year prior to the annual filing deadline may file a proposal. Proponents, or the shareholder(s) that file the resolution, are allowed only 500 words in the proxy statement to present their case. Management can take as much space as it would like to respond, but there is no opportunity in the proxy for proponents to respond to misleading information in the company’s statement. Shareholders may object directly to the company about its response, and if it is not corrected, they may decide to bring this to the press and publish it in their own proxy briefings. These briefings can be filed with the SEC for all shareholders to access.

SEC rules also specify issues that may not be addressed through proposals. For instance, anything relating to personal grievances or to operations that constitute less than five percent of revenue may be excluded. A company may challenge the proposal at the SEC if it thinks the proposal may be legally omitted. This is known as a “no-action” letter in which the company explains why it believes that it can omit the resolution from the proxy statement.

Many challenges relate to rules stating that issues pertaining to “ordinary business” may be excluded. However, proponents can challenge the company’s logic, and if the SEC sides with the shareholder proponents, the company is very likely to place the proposal on the company proxy statement to be voted on at the annual meeting.

Proposals must receive a minimum number of votes to be allowed on the proxy the following year. Proposals must obtain three percent of the total vote their first year to be resubmitted; six percent the second year, and 10 percent its third and subsequent years. If it fails to meet these minimum votes, it may not be resubmitted for three years.

If you hold mutual funds or exchange-traded funds (ETFs) or contribute to a pension plan, you do not hold actual company shares and cannot vote by proxy directly. However, you can contact your fund manager(s) and ask them to vote in favor of issues you feel strongly about. The next chapter goes into detail about how this works.

There are four categories of votes: for, against, abstain, and not voted. This last type means that if you do not vote at all, then your votes are automatically voted by management. If you are unsure about an issue, it is best to abstain as these votes are not cast either for or against a resolution and are not counted in the final tally.

Shareholders can vote their proxies via regular mail, Internet, phone, by attending the annual meeting in person, or by having your broker or proxy service vote on your behalf. Voting instructions are provided on the proxy, and votes can be changed as long as they meet the stated deadlines (usually 24 hours before the meeting). Those attending the annual meeting in person can change or submit their votes up to the very last minute. Those who do not vote their proxies in advance may have their ballot automatically cast by brokers or management.

The critical issue is how to cast your vote. This is why every year As You Sow publishes updated Proxy Voting Guidelines. This is different than our annual Proxy Preview that lists every environmental and social resolution at every company. The guidelines lay out a progressive set of voting preferences to help you make your voting decisions. Both are referenced in the resources section at the end of the book and can be downloaded at no cost.

Figure 4: You can vote your proxy ballots online, by mail-in, by touch-tone phone, or have a proxy advisor take care of it for a fee. Graphic by Tracey Fernandez Rysavy, Reprinted with permission of Green America, www.greenamerica.org.

The key issue in deciding how to vote is truly based on your values. By reading the guidelines and understanding each issue, you can understand why the proponent has filed the resolution and why management opposes it. If you agree with the guidelines as written, you can turn these over to your proxy service or financial advisor and instruct them to follow the guidelines for all voting, or you can vote yourself.