September 23, 2005
SEC Controls on Shareholder Voting: An archaic, cumbersome system
Each year I teach shareholder voting in the basic corporations course, I have to re-acquaint myself with the cumbersome system of shareholder voting that we accept for our publicly-traded companies. When done, I always come to the same conclusion: the procedure we use to enable the individual equity investors of United States companies to vote their interests is hopelessly outdated.
The corporations solicit votes by asking shareholder to vote by "proxy." A proxy is not an absentee ballot but a grant of agency to an individual who will be at the meeting. Firms hire a company, usual Georgeson Shareholder Communications, Inc., to prepare the proxy solicitation materials and count the votes. The proxy rules require that shareholders get a stylized, jargon laden two hundred page or so document (proxy statement) along with a single page form proxy. The requirement proxy statement begs to be thrown in the trash, if it is even opened.
Most individual equity investors, however, do not get the mailings from the company. The investors hold shares as beneficial owners in brokerage accounts or as investors in mutual funds.
A) The shares held in brokerage accounts are held in "street name." Legal title to the shares is held in a depository company maintained by the brokerage firm or a group of brokerage firms and equitable title goes to the beneficial owners (i.e. the shareholders). So the company material goes to the depository company that forwards it to the brokerage house that forwards it to the beneficial owners, the shareholders, with additional cover materials. The brokerage houses hire another firm, Automatic Data Processing Inc., to send out the materials and collect the votes. If the beneficial owners, shareholder do not vote, the brokerage company can vote the shares. Shareholder can choose to keep their identity secret, even from the company. They are OBOs (objecting beneficial owners). If they do not care they are NOBOs (non-objecting beneficial owners). The "pass-one" procedures vary for each brokerage firm. Companies must pay for their own mailings and the mailings of the intermediaries.
B) Shares owned through mutual funds are voted by the managers of the funds and until recently, the funds resisted disclosing their votes at all. The funds are still protesting the new rules forcing miminal vote disclosures. In any event, those investors owning shares in mutual funds (technically not shareholders at all) do not receive any information from the firms in the fund nor do they have any impact on how the funds votes.
This all means that individual shareholders do not vote and corporations cannot talk to their own investors in ways that shareholders may listen and read.
It is hard to believe that we are content to live with such a system. With all the calls for more shareholder participant in corporate governance, we should look at the system of communication we are pushing shareholder to use first. It would be easy to 1) reform the broker default vote rule for brokerage accounts (requiring a mirror rule/a vote that mirrors the percentages of votes actually turned in by beneficial owners) and 2) force mutual funds to solicit views from their large holders of beneficial stakes (with stakes large enough to give the investor an undiluted interest in at least one share of the company in issue).
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