Proxy -- it's all in the voting
Shareholders' yea or nay sends performance message to companies.
By Dian Vujovich
Special to the Daily News
Michael Mitrione, a shareholder and co-chair of the Securities and Corporate Governance practice at Gunster in West Palm Beach, said even though say-on-pay vote results are advisory, they 'force a company to analyze whether the CEOs pay is aligned with total shareholder return.'
Attending a shareholder meeting isn't a cheap trip. Between travel expenses, there's the cost of stock ownership that's required to get into the event. Even then, getting in the door and finding a seat can be tricky if you happen to be the shareholder of, say, Berkshire Hathaway. Attending their weekend rock-star-style annual meeting extravaganza takes a hard-to-get ticket and a desire to hang out with thousands.
Fortunately, most annual meetings don't come with that challenge. Or, look anything like Berkshire Hathaway's. Or, for that matter, the one presented in Adam Sandlar's 2002 movie, Mr. Deeds.
And most shareholders, unless they love annual meetings or are disgruntled shareholders with a desire to be seen and heard, don't attend these corporate events. Instead, exercising the right to vote for the majority of investors happens via proxy.
And lest you've forgotten, voting by proxy is an important thing to do. Questions awaiting your vote include everything from electing a board of directors to say-on-pay, as well as any number of other management moves that require a vote.
So as tempting as it may be to toss the fatter-than-ever proxy documentation pack into your circular File 13, don't. Read through it. And vote. Proxy votes count even though not all may be binding. (More on that point later.)/p>
Blame compliance concerns and the Securities and Exchange Commission for the growing number of pages in proxy materials these days. The SEC, which governs proxy solicitations and administers proxy-related laws and regulations, hasn't been able to make proxy documents easier to read and understand because of those compliance regulations.
As a result, weeding through proxy literature today is more time consuming today than ever.
"In just five years (from 2006 to 2011), the average length of proxy statements filed by Dow 30 companies increased 54 percent from 46 pages to 71 pages," Holly J. Gregory, a partner at Weil, Gotshal & Manges, wrote last summer in a column on corporate governance.
Consequently, they can be difficult to navigate for both investment professionals and average investors. So it's not unusual for investors to need assistance in digesting their proxy documents.
Proxy voting basics
Just as there is a social season in Palm Beach, there is a proxy season in the financial world. It typically runs from March to June and always follows the close of a budget year.
Thanks to technology, voting methods have changed over the years. Today, proxy voting can be done in in person at the annual meeting, by mail, by phone or online.
For Tom Walker, president and owner of First Palm Beach Advisory Inc., online proxy voting is best. "It's easy to do on the Internet, " he says.
For those who would rather avoid proxy voting, investors have one sure-fire method for sending a message about a company they've invested in: selling their stock.
Decide to sell all the shares of the company you've invested in and any responsibility that comes along with stock ownership is kaput. Plain and simple.
On the other hand, for all who own shares of a company on its record date, it's beneficial to know as much about what you're being asked to vote on as possible. (The record date is the date the company fixes when the investor must own shares to be eligible to attend corporate events, receive dividends or more.)/p>
So whether you own one share or 100,000, stock ownership gives all shareholders the opportunity -- along with the right -- to vote.
Getting it right
Michael Mitrione, a shareholder and co-chair of the Securities and Corporate Governance practice at Gunster Law Firm, has been a corporate and securities lawyer for 38 years, 34 of them with Gunster.
Given his knowledge, he offers insights into proxy voting and data surrounding say-on-pay: A rule put into effect in January 2011 as a result of the Dodd-Frank Act passed in 2010 that allows shareholders to weigh in on corporate pay practices. And do so at least every three years.
Question: Why is voting by proxy so important for shareholders to do?
Answer: The reason is because it generally takes holders of at least a majority of the outstanding shares to vote to have a valid meeting. That percentage includes proxy votes. If there is less than that amount, the meeting can't be held.
Q: Does that ever happen?
A: It usually only happens when there is something controversial related to the company. For instance, if a major shareholder, or shareholders, try to exert some leverage by not voting their shares.
But more often than not, shareholders vote their shares. So it's rare and when it happens the meeting does not go forward.
Q: I was talking to a money manager who said their company was doing the proxy voting for shareholders. Is that so?
A: Well, that's technically true, but here's what really happens: If your broker has your shares in street name, you'll get a voter instruction form sent to you. And then you'll will notify your broker about how you want your shares voted.
The broker collects that information and technically votes the shares in line with what the customers have said. For instance, if there are eight "yes" votes and one "no" vote, he would vote exactly like that.
Unless you have specifically delegated voting authority to your broker in writing or have a discretionary account, it is the individual customer who has voted. And even with a discretionary account, your broker might still come back and ask how you want your shares voted because they (the broker) really doesn't want to assume that voting responsibility.
Q: Do you have any figures about the number of people who really do use a proxy vote?
A: It varies by company. Based on the companies that Gunster represents and by what I've seen, usually it's in the range of 70 to 90 percent of the shares that get voted.
Q: Say-on-pay is one of the hot issues today and one that requires a shareholder vote. Tell me about it.
A: Say-on-pay gives shareholders a "say" on what the company is paying their CEO. And it is a hot issue, but I'm not sure whether it's really been worth all that's involved.
Q: What are the advantages of voting on it?
A: One of the advantages of a say-on-pay vote is that it makes boards and CEOs more accountable. And, forces a company to analyze whether the CEOs pay is aligned with total shareholder return.
For example, because say-on-pay focuses only on CEO pay and not what a company is paying anybody else, the main analysis considers things such as if the CEOs pay has gone up over the last three years but the shareholder return has gone down. If that were the case, the say-on-pay vote would probably be a 'no" vote.
Another good thing is that it forces a company to be more communications friendly with their shareholders -- both institutional and the general public shareholders. That's because a company has concerns about how the vote goes even though it is a non-binding vote.
Q: A non-binding vote? Really?
A: Yes, it's really just an advisory vote. So when they tally up the votes, just because let's say there are more "no" votes than "yes" votes on say-on-pay, it doesn't mean the CEOs pay changes. It's just kind of a straw vote if you will. And is a non-binding vote that results of which the board needs to take into consideration.
Q: Where's the value in that?
A: Generally what happens is when a company's say-on-pay approval vote is less than 70 percent, the company's board probably needs to take a hard look at their compensation program and figure out what needs to be tweaked or adjusted.
Q: How have say-on-pay votes typically gone?
A: Only 3 percent of the public companies in 2012 experienced a failed say- on-pay vote.
In the last couple of years, on average 73 percent of companies have experienced over a 90 percent favorable vote on say-on-pay.
But what also has happened is that there has developed a whole cottage industry of proxy advisory firms that now review every public company's proxy statements and then make recommendations to vote "yes" or "no" on the say- on-pay vote.
Q: To whom do they make those recommendations?
A: The recommendations are published. The average investor probably doesn't see them but the institutional investors do. And they (the institutions) are the shareholders that invariably have the largest number of holdings in a lot of companies.
I've seen studies over the past few years that have shown if the proxy advisory firms, like ISS or Glass Lewis, have recommended a favorable vote, the average favorable vote on say-on-pay has been about 95 percent. But, if they recommend a "no" vote, the average support that that item has received on the ballot is about 65 percent.
So it's about a 25 to 35 percent swing based on that recommendation.
More often than not, say-on-pay still passes because a lot of the general public just automatically checks "yes" and votes in favor of what the board recommends.
Q: Are they any downsides to recommendations from proxy advisory firms?
A: One is that it gives a whole lot of power to these firms because some institutional investors are just routinely voting based solely on what the firms recommend and are not doing their own analysis.
The second thing is it significantly increased the compliance expenses of companies. Those costs, of course, get passed through to the consumers.
Q: If there is one point you'd like to make about proxy voting what would it be?
A: I think it behooves all of us who are investors to keep an eye on our investments, to not throw away the proxies and to vote on what the company has asked us to vote on.
If you don't know how to vote, or don't understand the issue(s), get some guidance from your broker, accountant or lawyer. It's important for everybody to have some input rather than to just throw their vote away and let other people manage their investments.
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