The peak of the corporate proxy season is at hand, and advisers should remind their stock-owning clients to vote their proxies. While in most large public companies the majority of shares are owned by institutions
— mutual funds, pension funds, sovereign-wealth funds, hedge funds, endowments and foundations — voting by individuals has the potential to swing the pendulum on important issues.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 increased the importance of votes by individual shareholders by forbidding brokers from voting the shares without instructions from the beneficial owners in matters relating to executive compensation.
That will likely reduce the number of votes cast not only on the compensation issue but on other issues as well. That's because many brokers lacking specific instructions from their clients will likely forgo voting on those proxies altogether.
This year, executive compensation is a key issue. Dodd-Frank requires companies to allow a non-binding “say on pay” every one, two or three years — depending on shareholders' preference.
While many corporations are recommending such a vote every three years, the early results show shareholders are opting for an annual vote in most cases.
Another contentious issue involves participation by large shareholders. Last year, the Securities and Exchange Commission adopted a rule giving shareholders who have owned at least 3% of a company's outstanding shares for three years the right to propose their own slate of directors and have it included with the company's proxy documents.
Implementation of this rule has been bogged down by a legal challenge from the Chamber of Commerce and the Business Roundtable. The U.S. Court of Appeals for the District of Columbia Circuit heard oral arguments in the case last Thursday and is expected to reach a decision by this summer.
But the Council of Institutional Investors, which is dominated by large public-employee and union pension funds, filed an amicus brief supporting the SEC rule.
It argues that proxy access will make companies more responsive to their shareholders and will keep a sharper eye on management.
If the court decides in favor of the SEC, it will give shareholders another powerful tool for influencing corporate actions — too powerful, some believe. They believe public-employee and union pension funds could use the power of the proxy challenge with a competitive slate of directors to push social causes and union membership issues at the expense of maximizing shareholder value.
Say-on-pay has given shareholders a vehicle through which to express dissatisfaction with management's performance, as shown in the few cases this proxy season where shareholders have voted against compensation packages — at Jacobs Engineering Group Inc. and Beazer Homes USA Inc., for example.
The ability to have a vote on companies' compensation packages for senior executives could serve to get individual shareholders into the habit of voting their proxies.
Judging by the number of individual shareholders who have not bothered to vote their proxies, most have seen little value in them. However, the vote on compensation provided by the Dodd-Frank law has increased the value of the proxy, and it will increase further if the courts uphold the SEC's rule on competitive slates of directors.
Financial advisers should educate their share-owning clients about the proxy vote and urge them to use it. After all, they wouldn't allow the clients to throw away a
dividend check. The proxy vote ultimately could be as valuable as that check.
