10 Surprising Ways Voting for President Mirrors Shareholder Voting

Let's face it. As the presidential election looms, we've all become political junkies. We've spent far too much time following each nuance of this strange election. Voting as a shareholder seems boring, civil, and straight-laced by comparison.

Or is it?

Voting as a citizen has much in common with voting as a shareholder of a publicly traded company. And both matter.

2016-11-01-1478005926-9186341-sVOTINGsmall.jpg

1. Voting is voluntary. People should vote, but often don't.

Citizens, at least in the U.S., are not obliged to vote. Many don't.

Shareholders of public stock are also not legally required to vote. In fact, most retail (individual) investors generally don't vote. Think of those bulky forms that arrive in the mail and immediately get tossed in the recycling bin. Only 13 percent of retail investors vote, according to estimates by Broadridge.

Institutional investors, however, are obliged to vote, as they are generally considered fiduciaries - legally bound to put clients' interests ahead of their own. As fiduciaries, they have an obligation to protect client assets. And voting rights are considered an asset. Stock that carries voting rights trade at a premium.

Stock owners who are passionate about their futures, especially Millennials who have indicated a desire to align their finances with their values, should vote.

2016-11-01-1478006023-2235237-ShareholderActionGuideShirt.jpg

"It's really important for every investor to vote every share" says Andrew Behar, CEO of the non-profit As You Sow and author of The Shareholder Action Guide: Unleash Your Hidden Powers to Hold Corporations Accountable, which will be published on November 14, 2016. "Individual investors need to be informed about what their investments mean to their families, their planet, and themselves. People can send a message to companies by what they wear, what they eat, and what they buy. But our investments hold the biggest impact and send the strongest message."

"Individual investors need to be informed about what their investments mean to their families, their planet, and themselves." -- Andy Behar, As You Sow

2. Voters can be influential - even when they lose.

Political analysts will spend the next several years analyzing voters who cast their vote for the losing side. Their influence is likely to be felt for years.

Often, in the corporate arena, shareholders submit non-binding resolutions. These shareholder resolutions offer shareholder groups a chance to persuade a company's management to change course, explain long-term strategy, or identify risks. Increasingly, shareholder resolutions push companies to further their commitments to improve environmental, social, or governance performance.

Non-binding shareholder resolutions, even with a low vote, often succeed in prompting corporate change as they associate a company brand with a policy that is out of alignment with that brand's image.

"Clearly non-binding resolutions are changing the corporate landscape," notes Bob Litterman, who managed risk during his 23-year career at Goldman Sachs and is now Chairman of Risk Committee at Kepos Capital, a New York-based hedge fund. "Some corporations are facing increasing pressure from shareholders to address climate risk. A great example is ExxonMobil, which has a long history of funding climate change denier organizations and which has continued until very recently to misleadingly argue that the transition to a low-carbon economy is very expensive.


"Clearly non-binding resolutions are changing the corporate landscape." -- Bob Litterman, Kepos Capital

"Following a broad set of shareholder initiatives at its 2016 annual meeting; pressure from several state attorneys general; and regulatory initiatives from the Securities and Exchange Commission (SEC), the FSB (Financial Stability Board), and others, such as the Sustainability Accounting Standards Board (SASB) pushing for climate risk disclosure, Exxon has begun to argue that it takes climate risk seriously and supports a carbon tax."

2016-11-01-1478006159-408748-BobLitterman1.jpg

No doubt shareholders will be encouraged to raise even more questions for ExxonMobil, based on the newly published report "Red Flags on ExxonMobil." Aimed at institutional investors, this report by Tom Sanzillo, Director of Finance at IEEFA, suggests their investments in ExxonMobil are at significant financial risk.


3. Voting is more complicated than it appears at first blush.

Political voting, some say, is complicated. Citizens must register to vote, which is easier in some places than others. Polling places may have limited voting hours, and may be far from a voter's home or workplace. Many voters may have strong information about presidential candidates, but know comparatively little about "down ballot" candidates.

Shareholder voting is in some ways more complicated, and in others much simpler.

Institutional investors are faced with thousands of votes each year. Many outsource their voting to proxy advisory firms, such as Institutional Shareholder Services (ISS) and Glass Lewis. These proxy advisory firms make recommendations and, in some cases, vote on behalf of their clients.

The influence of proxy advisory firms is debated. Some believe they represent the interests of their clients, who are free to accept their recommendations or not. Others believe their influence is waning.

Daniel Gallagher, who served as one of the five Securities and Exchange (SEC) Commissioners between 2011 and 2015, has been critical of proxy advisors. In a July 2013 speech before the Society of Corporate Secretaries & Governance Professionals, Gallagher said he had "grave concerns as to whether investment advisers are indeed truly fulfilling their fiduciary duties when they rely on and follow recommendations from proxy advisory firms." He made specific recommendations regarding issues "arising from the outsized and potentially conflicted role of proxy advisory firms."

"...grave concerns as to whether investment advisers are indeed truly fulfilling their fiduciary duties when they rely on and follow recommendations from proxy advisory firms" -- Daniel Gallagher, former SEC Commissioner

For shareholders eager to vote without using an advisor, it can be a relatively simple process. Each proxy statement can be emailed and voting can be done online. The issues are listed and explained in an easy to read format in Proxy Preview, which is published each March. Every year, Interfaith Center on Corporate Responsibility (ICCR) offers an extensive guide to shareholder resolutions and a voting guide on its site. And As You Sow offers a progressive set of voting guidelines, which can be adapted or used as is.

4. The voting process can get heated.

This presidential election has been nothing if not heated. Friends and even spouses have clashed over political differences.

Contested proxy fights can be surprisingly contentious and heated as well.

"Proxy fights in which an activist investor attempts to replace directors or management can be contentious and at times emotional," notes of Bill Anderson, Senior Managing Director of Evercore. He has spent his career, which he aptly defines as "eventful," advising companies facing activism and in public company M&A - where shareholder votes can make or break a deal.

2016-11-01-1478006230-1973628-Bill_Anderson_Evercore_Photo1.jpg

"The fights can cost millions of dollars, with both sides hiring lawyers, public relations firms and other advisors," he adds. "With well over $100 billion in assets under management controlled by activist funds, and with universal proxy cards, proxy access and other new rules making it easier for shareholders to effect change, the trend toward contested proxy voting is likely to continue."

"The fights can cost millions of dollars, with both sides hiring lawyers, public relations firms and other advisors. . . . With well over $100 billion in assets under management controlled by activist funds. . . . the trend toward contested proxy voting is likely to continue." -- Bill Anderson, Evercore

5. Voters are overly dependent on advisors.

The influence of "advisors," such as the media, to influence voters has been much-discussed this political election. Voters tend to listen to media that reinforces their own views.

Most investors, whether they realize it or not, also rely on advisors who vote their ownership interests. Individuals generally own shares indirectly, through mutual funds or index funds. Mutual funds own roughly a quarter of U.S. corporate equity. Some large mutual fund families hold blocks of 10 percent or more in dozens of large US corporations, according to a study published by Davis and Yoo in 2003.

In many cases, individuals are convinced that they have little choice about which funds they can select in their employer's retirement funds, often being limited to a single firm's family of funds and not realizing that they have the power to work with their 401k administrator to expand these choice to align with their values. They rely on investment managers of these funds to vote for them.

If they're Millennials, as a growing number of investors are likely to be, they might want to be sure investment managers are voting their particular interests. As they're still young, they should be specially concerned with the long-term as they will not retire for decades.

2016-11-01-1478006285-1146812-JohnsonKeithPhoto2015.jpg

"A lot of people would be shocked to see how their shares are being voted, especially on CEO compensation and/or climate change," notes Keith L. Johnson, who heads the Institutional Investor Legal Services team at Reinhart Boerner Van Deuren, a law firm that represents pension funds and institutional investors on fiduciary, investment, securities litigation and corporate governance program matters. "Mutual funds must post their voting record, but these records are not easy to find. There's virtually no accountability in proxy voting area."

"A lot of people would be shocked to see how their shares are being voted, especially on CEO compensation and/or climate change." Keith Johnson, Reinhart

6. Voters decry - potential and actual - conflicts of interest.

Voters have been dismayed to learn details about candidates that suggest conflicts of interest.

Investment advisors can also be conflicted. Asset managers often vote in ways that seem at odds with their investors' interests, which may arise from their own conflicts, such as hoping to get advisory business from companies, for example. A case in point is BlackRock and Vanguard, which collectively are ExxonMobil's largest shareholders, with 11 percent of its stock. They voted against the shareholder resolution that called on Exxon's management to disclose a climate-risk report, siding with ExxonMobil management.

This may appear puzzling, as BlackRock Institute has issued statements and reports suggesting risk due to climate change has been "under-appreciated and underpriced." BlackRock's CEO, Larry Fink, has advocated for firms to focus on creating long-term value by increasing investments in R&D and capital expenditures. And Vanguard arguably has done more than any other financial institution to drive down fees, which has transformed the financial landscape for both individual and institutional investors.

"By voting against a motion that would have required ExxonMobil to make disclosures about the impact of climate change on the business, the asset managers ignored responsible investment commitments they had made, the AODP [Asset Owners Disclosure Project] says in its ExxonMobil Investor Engagement Report," according to an article in FundStrategy.

The business connections impact on mutual funds were examined in a scholarly study by Cvijanovic, Dasgupta, and Zachariadis. Their findings, based on a review of voting records between 2003 and 2011, suggest that business interests may improperly lead advisors to side with company management.

7. Political discourse is rude. Corporate discourse can be, too.

The political dialogue reached new lows in this election.

Corporate voting, by contrast, seems civil. Ballots arrive in the mail. Talk radio and cable news shows rarely cover proxy battles where activists (called dissidents) sometimes try to wrest control of a company's management.

But just as in political discourse, corporate can be powerful, and is often quite rude (though, to be fair, rarely as crude as we're seeing in politics.)

Consider Dan Loeb, a billionaire hedge fund manager and activist investor whose letters to company management are legendary. For example, in a 2005 letter to Star Gas CEO, Loeb wrote: "Sadly, your ineptitude is not limited to your failure to communicate with bond and unit holders. A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America. (I was amused to learn, in the course of our investigation, that at Cornell University, there is an "[Star Gas CEO] Irik Sevin Scholarship." One can only pity the poor student who suffers the indignity of attaching your name to his academic record."

"A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America."--Dan Loeb, in letter to Star Gas

8. (Some) voters wonder: Is the system rigged against individuals?

Candidates for election are selected by their political party based on a complicated system of primaries and caucuses, delegates and super-delegates. Bernie Sanders supporters, for example, wondered if the system played fair.

Candidates for election for Board of Directors are put forth by the company's management or shareholder activists, who generally have significant ownership stakes in the companies, often between 1 and 5 percent. More importantly, perhaps, they deploy millions of dollars to launch a proxy fight.

While any shareholder technically can nominate a candidate for the board, unless their candidate is on the official company ballot, it's up to that shareholder to inform fellow owners about the prospective new director. Think: millions of dollars.

Legislation in the 2010 Dodd-Frank Act would have changed this, with a provision called Proxy Access, in which shareholders who owned 3 percent of the company for three years could both nominate candidates for director positions and require the company to add these candidates to the official ballot. Just before proxy access was formally rolled out by the SEC, it was challenged in court by the Chamber of Commerce before it went into effect.

Shareowners, however, have filed hundreds of proxy access resolutions on a company-by-company basis over the past three years and have successfully won more than 115 of these with majority votes forcing companies to change their by-laws. Seeing that these resolutions are coming, many companies have adopted their own proxy access rules making it easier for long-term large shareholders to nominate directors.

9. Voters can cross party lines.

In the political realm, voters are free to select candidates from each political party in the general election. Their "down ballot" vote need not match their vote for president.

Proxy voters might soon be able to vote for a combination of board candidates proposed by company management and the so-called dissidents, due to a new rule issued proposed by the SEC. These rules would require "universal proxy cards" in contested elections. Until now, voters who did not attend the annual meeting in person -- the vast majority of shareholders -- were, in effect, forced to select the full slate of management candidates or a full slate of candidates put forth by the activists.

SEC Chair Mary Jo White and SEC Commissioner Kara Stein note the proposed rule would "update" the proxy voting process, allowing voters to select candidates from either "side" that best represent their interests.

"The rule would allow shareholders to select the best individual candidates for a company without being forced to simply vote either for or against the management slate," notes Keith Johnson, of Reinhart Boerner Van Deuren. "It's a subtle, but powerful, way to move shareholders away from voting a party line toward a more refined focus on construction of the most capable board."


"It's a subtle, but powerful, way to move shareholders away from voting a party line toward a more refined focus on construction of the most capable board." -- Keith Johnson, Reinhart

10. Participation in the process doesn't change anything. . . . Or does it?

Not everyone agrees that participating in the governance process matters, whether in the political or financial sector. Some opt to abstain from the political process altogether.

In the corporate world, some investors have opted to divest, doing the so-called Wall Street walk. Divestment is an investment strategy that includes selling and/or deliberately not owning specific categories or stock, such as companies that produce tobacco, weapons, or fossil fuels. Other investors choose to vote their shares and to actively engage with companies.

There is raging debate about which strategy is the most effective.

2016-11-01-1478006344-4631805-CaryKrosinsky.jpg

"Divestment as an investment strategy on fossil fuel production has been, from a societal point of view, largely a wasted opportunity," notes Cary Krosinsky, who teaches sustainability and investing at Brown and Yale, and is the editor of numerous books on Sustainable investing, including the upcoming Sustainable Investing: Revolutions in theory and practice. "If you're an investor, you might want to sell companies with no clear financial future as the outcome of your process - but this is not the same thing as divestment."

"Divestment as an investment strategy on fossil fuel production has been, from a societal point of view, largely a wasted opportunity." -- Cary Krosinsky, author of Sustainable Investing

"What society needs is different," adds Krosinsky, "and divestment doesn't achieve what we need. Oil continues to flow, as do annual carbon emissions. An intentional low carbon transition through changes in energy cost curves, policy, as well as scaling innovation and implementation is what is needed. We need to intentionally enable a necessary transition to a low-carbon economy and there's no time to waste."

Divestment, however, has its champions. Some believe voting with their feet is the most effective strategy, sending a clear and unambiguous signal. Bill McKibben, environmentalist and founder of 350.org, has been one of the most well known voices for divestment.

"It's clear that shareholder activism and divestment is a good pincer move. Which one is going to turn out to be the most effective, I don't know," notes Hunter Lovins, President of Natural Capital Solutions and Professor at BardMBA. "I haven't seen a lot of impact from people saying they're voting their shares. But I would not say to stop. I do not want to criticize anyone in the field [of impact investing] who's trying to make a difference."

2016-11-01-1478006392-2327774-HLsm_R.gif

"It's clear that shareholder activism and divestment is a good pincer move. Which one is going to turn out to be the most effective, I don't know. I come down on the divestment side." -- Hunter Lovins, Natural Capitalism Solutions

.

"Our movement is enough of a bucket of crabs. If anyone is being active and engaging the companies, that is a good thing. I come down on the divestment side. I've invested in a truly fossil-free portfolio. I could be wrong, but I sure feel better about my holdings."