Proxy voting is one of the most powerful but underutilized tools that fiduciaries have to serve the best interests of investors. Through their voting power, shareholders, especially institutional shareholders, have the ability to influence directly how the companies they own are managed.
Individual investors generally are not sufficiently organized or well-informed to protect their own interests through the proxy-voting process, but these retail investors own only about one quarter of U.S. equities. On the other hand, institutions, including retirement plans, foundation investment committees, mutual funds, hedge funds, sovereign-wealth funds and other investment managers, have the scale, structure and the fiduciary obligation to vote proxies in a manner that serves the best economic interests of the shareholders they represent. It's also important to recognize that when institutional investors wield their proxy power, all shareholders, retail and institutional, reap the benefits.
Unfortunately, many institutions — particularly investment managers — do not do a good job of fulfilling their proxy-voting duties. In comments addressing the proxy-voting provisions of the CFA Standards of Professional Conduct, the CFA Institute said: “Historically, managers have paid little attention to voting their proxies, mostly because they are primarily interested in factors such as company fundamentals or the price pattern on a stock. Moreover, when disenchanted with management, they would rather cast a vote their own way, by selling the stock, rather than go through the proxy-voting process.”
This explanation is by no means a satisfactory justification for inaction.
The fiduciary obligations of loyalty and due care require responsible fiduciaries to vote proxies actively and consistently, and document their proxy-voting procedures and the specific votes cast. When an investment steward has delegated responsibility for proxy voting to an investment manager, the steward is obligated to understand, approve and monitor the manager's policies and procedures, and voting record. Fiduciaries need to manage the process to mitigate litigation and regulatory risks.
But there is much more at stake than simple compliance. Again quoting the chartered financial analyst standards: “Actively exercising this [proxy voting] right can not only promote higher standards for corporations (given that entrenched management teams can no longer take proxy votes for granted) but also ultimately in-crease portfolio value, as the proxy vote reinforces the fact that companies must be managed in the best interests of shareholders.”
The phrase “ultimately increase portfolio value” is especially important. Proxy issues typically focus on policy, strategy or structure and therefore concentrate on matters that affect long-term investment value. There is ample evidence to suggest that investors, corporate boards and executives, and even regulators, are overly focused on short-term issues and results. Yet people are presumed to be reliant upon long-term investment success. Short-termism prevents key decision makers from giving adequate consideration to the big-picture issues. The proxy-voting process serves to direct attention to the subjects that matter most — the issues that help corporations and their investors to achieve sustainable success.
Adopting a long-term perspective not only is necessary and proper, it can be liberating for fiduciaries. The obligation to promote the economic interests of the investors served by a fiduciary often is improperly framed in a short-term context. In fact, the fiduciary is expected to align decisions to the time horizon of the beneficiaries, which are generally long-term. This provides fiduciaries greater freedom to exercise professional judgment in considering the factors that ultimately influence investment value.
The primary call to action for investment fiduciaries is to establish and document clear proxy-voting procedures to:
• Guide decision making on the issues subject to votes.
• Record the votes cast.
• Monitor the procedures and voting records of any fiduciaries to whom voting responsibilities have been delegated.
For practical guidance on how to prepare proxy-voting procedures, there is a new report out from the nonprofit organization Ceres (ceres.org), which works with companies to address sustainability issues. The report, “Proxy Voting for Sustainability,” is a resource guide that provides specific proxy procedures pertaining to sustainability principles, as well as examples of voting guidelines.
Blaine F. Aikin is chief executive of Fiduciary360 LLC.