Understanding Shareholder Votes
What Is a Shareholder Proposal?
Shareholder proposals are a formal communication channel between shareholders and management. Shareholders were given the right to make recommendations to a company and its board of directors in the Securities and Exchange Act of 1934.
There are several hundred shareholder proposals filed every year. Proposals to be voted on are placed on the company’s Proxy Statement, and all persons and institutions that own stock in the company can vote on the issue.
There are two common types of proposals filed - governance and social. Governance proposals focus on traditional management issues such as executive compensation, board composition, shareholder rights, and voting requirements.
Social proposals call for reports or policy changes on social or environmental issues that can impact a company’s bottom line such as climate change, employee discrimination, toxic products, and sustainability.
Are Shareholder Proposals Successful?
The vast majority of all shareholder proposals are non-binding (meaning the company does not have to comply), but companies with good management values generally respond to the concerns of its shareholders.
As a non-binding vote a majority vote is immaterial* and is not needed for the company to respond to the will of its shareholders. There are numerous examples of companies compiling with the concerns of shareholder proposals.
Sometimes it is just one issue being raised at an individual company – for example a proposal filed by As You Sow at Home Depot asked the company to phase out of selling wood from old-growth forests. The proposal got the support of 11.8% of the shareholders and shortly thereafter, the company announced it would stop selling wood from endangered forests.
Other times it may be the same issue being raised at many companies. Over the years the “Report on Political Disclosure” shareholder proposals has convinced 73 companies to adopt disclosure and board oversight of their political spending. Shareholder proposals calling for sexual orientation non-discrimination helped convince 70% of Fortune 1000 corporations in the US (and 97% of Fortune 100 companies) to bar discrimination in employment based on sexual orientation. And 58 companies have adopted an advisory vote on executive compensation as advocated by the “Say on Pay” proposals.
For decades shareholders have effectively utilized the shareholder proposal process to improve corporate practices on issues ranging from environmental impacts, product safety, and discrimination in employment – thus reducing or eliminating legal, regulatory, or reputational risks to the company and shareholder value.
If Proposals Are Non-Binding, How Do I Interpret the Vote?
Most proxy votes are dominated by company management and a few dozen large financial institutions (who often automatically vote with management) that comprise the majority of a company’s shares. Consequently, it is difficult and extremely rare to get a majority vote on a proposal.
Recognizing this, the SEC requirement for a proposal to receive enough votes to be re-filed for the following year is 3% for the first year, 6% the second year, and 10% the third year.**
While this seems small if measured in the typical electoral sense of receiving a majority vote, shareholder votes are more accurately interpreted in regards to their level of “influence.”
In most cases, an investor with 3% ownership in a company would be one of the top shareholders and thus even single digit votes may gain considerable attention from a company. Social proposal votes more than 10% are difficult to ignore and often result in some action by the company to address the shareholders area of concern. Votes that receive 20-30% or more have garnered strong support from mainstream institutional investors and send a clear cut single to management. Only the least responsive of companies is willing to ignore one out of every three or four of its shareholders.
* = It is rare but there are occasionally binding resolutions filed. The criteria for these depend on a complex set of federal, state and company by-laws.
** = Most people are surprised to learn that the vote is actually about a proposal meeting the SEC threshold to be refilled for the following year (and that a first year proposal receiving 3.1% of the vote is considered a ‘win’ by the SEC standards). Confusion about the vote is further complicated by the fact that the SEC threshold only calculates For vs. Against votes; yet some companies report all the vote category results of For, Against, Abstain and Not Voted – thus giving a deceptively lower figure for the shareholder proposal’s actual vote.