What is Proxy Voting?
As a CERTIFIED FINANCIAL PLANNER™, I often receive phone calls from my clients about weird-looking envelopes the have received in the mail. It’s normally what looks like a bunch of legal and technical speak. If you had no idea what was going on, you'd surely be confused, and for many first-timers, this is a reasonable scenario.
Being a financial coach, it's my job to educate my clients about financial terms and strategies and what comes with those strategies. Unfortunately, receiving a Proxy Statement is something that's often glossed over by financial professionals (until it's time to get one). That's why today we're discussing what Proxy Voting is, what Proxy Statements are, and what all of this means to you, the companies you're invested in, and the individuals those companies affected.
Often the decisions we make in proxy-voting context can feel monotonous and are often overlooked or simply thrown away.. However, the information contained in a proxy statement that you will go on to vote can sometimes mean important changes to your investment. My hope is that not only will you come away with this with a bit more knowledge of what proxy voting is and how it can help you - but how proxy voting or voting at all can help everyone.
What is a Proxy?
As we often do, let's start with the basics. What's a Proxy? Other than just a really neat-sounding word, a proxy is a person, format, or agent that's legally allowed to cast votes for someone absent from a meeting. In more simple terms - a proxy is how you cast your votes in a meeting from afar. Investopedia defines a proxy as "an agent legally authorized to act on behalf of another party or a format that allows an investor to vote without being physically present at the meeting."
As a shareholder in a company, not only do you have the ability to make money through the investment, but you also have what can be referred to as an ownership interest. We often think of ownership of a company as the CEO or founder, but for publicly traded companies, the ownership lies with the shareholders. With ownership interest, you're entitled to vote (with the many others who have an ownership interest) on critical decisions that will be made about the companies board, management, and proposals. This can be expressed through voting, or more specifically, to our discussion today - proxy voting.
For shareholders, a proxy often comes very simply by either mail, phone, or electronic ballot. These would be examples of the formats which we spoke of just earlier. So while it sounds like it could be a lot to take in, a proxy really isn't that difficult to grasp. However, there's very much more that comes along with a proxy, or a proxy vote, which we'll soon discover.
Voting in Person Versus Proxy Voting
Though it would often be beneficial to vote during shareholder meetings, that's not always feasible. We all lead full lives in which we're the sole shareholder and must be present to make our own decisions. That's essentially why proxy voting exists. Unfortunately, proxy voting isn't quite the same as voting in person. In other words, there are pros and cons to proxy voting.
Proxy voting is obviously incredibly convenient. Like I said before, we're the only one who's able to make key decisions in our own lives - we can't rely on other stakeholders to show up and vote for us. This is one reason that voting by proxy is incredibly convenient. Proxy voting is also available to us in various ways now, including by phone, electronically (over the internet), and by mail. Also, it's worth noting (albeit somewhat obvious) that proxy voting is 1/1 with traditional in-person voting. Your vote still carries the same weight whether you vote by proxy or in person.
Who Must Send Proxy Statements?
All of this sounds great, but it isn't all-encompassing. The skinny of the situation is that Publicly traded companies are required to provide shareholders with proxy Statements before meetings to make informed decisions. This is required by the Securities and Exchange Commission (SEC).
Meetings in which proxy statements must be submitted to shareholders before a vote include annual, special, and stockholder meetings. These statements contain information about management and the board of directors, legal information, compensation of executives (such as the CEO), accounting information, and information about shareholder proposals. I know that's quite of bit of information.
Ways to Vote by Proxy or In Person
We have brushed past this a couple of times. A vote may be taken in various ways, including by mail, electronically, by phone, or in person. The most traditional method that people vote is by attending a meeting in person. However, this option may be inconvenient for shareholders who have other things going on.
As far as the other options go (mail, electronic, or phone), companies typically provide information on how to do this. This is generally done by including information with a proxy statement in the mail. When voting by mail, the shareholder either fills out or prints off a proxy card provided by the company to mail back in. Electronically, a shareholder may be able to vote by logging into a provided website and casting their votes via the internet.
While these are convenient options for shareholders unable to attend meetings, it must be noted that responses are often required to be submitted at least 24 hours in advance of the meeting. With electronic means, this is relatively simple (IE... submit your electronic form a day in advance). However, through the traditional post, transportation time must be taken into account and planned for to submit your votes.
The Categories of a Vote
As far as voting itself goes - it's not just yay or nay. There are actually four options that you may take when voting, either by proxy or in person. These options are typically "For," "Against," "Abstain," and "Not Voted."
For and against are straightforward. If you vote "for" something, that means you're voting for it, while if you vote "against," that means you're voting against it. "Abstain" and "Not Voted" are similar but a little different. Abstaining means that you're actively casting your vote to not participate in the vote. In other words, you mark "abstain" on your voting sheet. "Not voted," or withholding your vote simply means that you don't mark anything on your card or sheet.
While abstaining or not voting may seem pointless to some, either option comes with implications. For some voting processes, a majority vote will be needed to elect someone or pass a proposal. This means that abstaining or not voting could affect the outcome negatively even though you aren't actively voting against it. It's difficult to say precisely how either of these will affect specific scenarios because the specifics of situations like these may vary depending on each individual company's proxy statement.
What are Proxy Statements
We've talked quite a bit about proxy, proxy voting, and proxy statements. However, we haven't discussed exactly what a Proxy Statement is and what might be in it. A Proxy Statement or the Form DEF 14A is also called a definitive proxy statement. These are required to be distributed to shareholders when a vote is needed. As we've discussed, these forms act as an outline and informative document for items to be voted upon by shareholders. Now let's talk about what some of those items might be!
The first thing that you're going to see on almost all definitive proxy statements is a bunch of legal jargon and sets of rules. These are easy to skim through or not read. However, they're incredibly important. This section essentially will outline in a legally binding way how you can vote, as well as the discrepancies about how your votes may count. This includes how abstained votes and withheld votes may count as well as how your votes may be submitted and the specific rules which outline whether or not they'll count (like that 24-hour deadline we talked about).
One of the following things you'll likely see is information about management and the board of directors. This will likely include information about each board member's and executive's background and current position. It may also include more biographical information. This is intended to give a fully rounded picture of each person. Either in this section or a section after it, you'll likely also see information regarding management's compensation as well as their performance, which should give an idea of how they're doing in the position they're currently in at the compensation they presently have. Compensation information could include both base pay and variable pay. Variable pay includes things like stock, bonuses, and incentive pay.
Next, you'll likely have a section on what specifically is going to be voted on. You can think of the first section as a "ruleset," the following few sections as background information, and these sections as the outline. The outline section or sections tell you who's being voted on (whether or not they'll continue with the company), individuals who're attempting to enter into the board of directors, and CEO and management compensation.
Likely in the last section of the definitive proxy statement, you'll receive information about something called Shareholder Resolutions or Shareholder Proposals. This is information regarding things that the shareholders have voted and agreed to vote on. By nature, it's difficult to predict what might be in a shareholder proposal. However, while Shareholder Proposals historically have had a difficult time getting passed, the tide seems to be changing as these proposals have become more popular and significant in recent years.
If you think this is a lot of information, it is. However, it's small-scale compared to what you might actually encounter on a proxy statement. And if you're intending to vote by proxy, the information included in this statement is crucial. This is your lifeline of what's going on in the company, how key players in the company are performing, and how the shareholder base is feeling.
Voting on Accounting Firms
Another item that you may find in your definitive proxy statement to be voted on by proxy or otherwise is accounting firms. It may seem odd that accounting firms would be an issue to be discussed, debated, and voted upon. After all, accounting never changes, right? Well, as it turns out, this is a fundamental issue and one that you should pay close attention to as a shareholder. Not all accounting firms are the same. They operate differently, and some might be better or worse than others, which will directly impact the strength of the company.
However, there's a bit more to it than that even. When it comes to voting about accounting firms, there are essentially two trains of thought that many shareholders and voters take. The first one is that having a longstanding accounting firm creates consistency and a good relationship with the firm. However, the opposing view is that having one accounting firm for too long can create a buddy-buddy atmosphere that leads to too much laxity. This can be a serious issue, especially considering that the accounting firm manages your company's books and the fees that are charged.
Proxy Cards - Your Key to Voting
Moving on, Proxy Cards are where the rubber meets the road. Your proxy card is essentially your ticket to vote either in person, electronically, over the phone, or by mailing in the card. These are vital and contain information as to how to go about voting by telephone or electronically. And if you plan to vote in person or by mail, the card must either be filled out and mailed in or filled out and presented upon arrival to the meeting.
On the first page of a proxy card, you'll often find information about the company, including a return address. You'll also likely see instructions about how to fill out the card. This is also where you'll most likely find the information about voting by proxy if you do not intend to show up to the meeting in person.
On the following page/pages, you'll find the voting items. These are the candidates to be elected or not as well as propositions from management and shareholder proposals. If voting by mail or in person, this is where you'll mark your responses to each item. As we've discussed, the three responses you may make are "for," "against," or "abstain. You may also choose to not mark an answer and withhold your vote.
The next section that you'll find will pertain to "non-voting items." These may vary depending on the company as well as the time it's mailed. However, you'll likely find the option to change your address as well as an area to write comments and constructive criticisms. Finally, on the last page/section of a proxy card, you'll be prompted to authorize the proxy card (and your votes) by printing the date, your signature, and possibly a second signature for verification purposes. If you're interested in seeing what a Proxy Card might look like, here's an example from the Security and Exchange Commission.
When is Proxy Season?
Proxy season is the season in which companies host their annual meetings for shareholders. Each company is different, and while most meetings typically happen during proxy season, it isn't a rule or regulation. The proxy season generally occurs between April and May, which gives the company plenty of time before the end of its fiscal year in December.
The Democratic Process Brought to the Business-Front
As a shareholder in a company, you have the right to vote on issues. How you choose to vote may be up to you. However, it's incredibly important that you do vote - even if that means withholding or abstaining from a vote. Though the pool of voters may be significant, you have the ability to affect elections and proposals that will impact other shareholders, workers, management, as well as society at large.
If you'd like to learn more about voting by proxy, proxy statements, or proxy cards, please, feel free to call or email to schedule an appointment with me. Together, we can create a financial plan that helps you make the most out of your investments and impact the companies you invest in.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.