Prior to the general meeting of a company or mutual fund, shareholders will receive a package in the mail containing a variety of documents that report financial data and operations results and announce important issues - such as proposals for changes to the company's share structure or mergers and acquisitions. These are all matters that shareholders or unit holders, the true owners of the company or mutual fund, will vote on at the general meeting. If, however, a shareholder is not able to attend an annual (or special) meeting, he or she can vote on proposals by means of a proxy, one of the documents that is included in the pre-meeting mailing package. (To learn more, see Knowing Your Rights As A Shareholder.)

The Purpose of Proxy Voting
Shareholder voting is the primary means by which shareholders can influence the company's or mutual fund's operations, its corporate governance and even activities of social responsibility that may fall outside of financial considerations. It is therefore very important for shareholders to participate in the voting and make their decisions based on a full understanding of the information and legal documentation presented to them.

At shareholder meetings, investors with common shares (or mutual fund units) typically receive one vote per share (or unit), unless they own shares carrying additional voting provisions. The votes of shareholders who are absent from a meeting and have not used a proxy card bearing their signature are considered to be abstained--they count neither for nor against any proposal tabled at the meeting.

But proxy voting allows shareholders to vote when they can't attend a shareholder meeting, so investors are quite literally able to own and vote on equities in companies and mutual funds that might be located and registered clear across the globe.

Voting Proxies Electronically
In the age of the internet, investors can not only buy and sell stocks online, but also vote their proxy statements. The entire documentation delivery process can be electronically automated. Official documentation is delivered to shareholders in electronic form, and then they log onto the system with a control number or personal identification number and vote for or against the resolutions presented.

Proxy Voting Guidelines
The internet also greatly assists shareholders in researching their decisions. Numerous institutional investors now post their voting decisions online prior to the meeting date, giving individual investors a chance to see where the large institutional shareholders stand on issues. These same institutions may also provide extensive explanations of their decisions by posting their 'proxy voting guidelines'. For example, institutions may cast their votes on criteria of long-term value, corporate accountability, responsibility, sustainability, and so forth.

The most proactive of institutional investors play a sort of champion role in keeping directors accountable for the resolutions that are introduced at important meetings. Not only will the institution establish its model proxy voting guidelines, but if a decision is initially unclear, it will seek additional information from the company itself. For example, an institution might contact management directly to discuss a specific proposal, suggest modifications to the nature of the proposal, or in extreme cases, urge the withdrawal of the proposal in its entirety. Such influence is generally held only by powerful institutional investors, making the institution's role in the proxy voting process invaluable.

Innovations to the Proxy Voting System
In the wake of much-publicized corporate scandals perpetrated by the management and directors of various publicly-traded companies over the years, more consideration has been given to potential revisions of the proxy voting system--most significantly, the possibility of shareholders taking an active role in introducing resolutions to the proxy. These proposals are often termed "direct proxy access" and focus most prominently on the possibility of allowing shareholders to nominate director candidates. On the one hand, this could bring fresh perspectives to the board of directors; but on the other hand, lack of experience (among other factors) could cause shareholders to nominate directors who are truly inappropriate for directorship.

Proxy voting is often the sole means by which investors can have a say in the business operations and societal activities of their company or mutual fund. Shareholders need not attend an important meeting in person, but they certainly must make the effort to read and understand legal resolutions and use all available resources to make an educated vote based on their best knowledge and information.

To learn more on a shareholder's responsibility, see Socially Responsible Mutual Funds and Putting Management Under The Microscope.

Related Articles
  1. Stock Analysis

    5 Reasons Thoratec Corp. Keeps Impressing Investors

    Learn about Thoratec Corporation and its position in its industry. Understand five key factors why the company has impressed investors.
  2. Entrepreneurship

    Top 5 Startups That Emerged in Boston

    Learn why Boston is a hot market for startups, and familiarize yourself with a few of the top startups that have emerged from the city.
  3. Professionals

    Index or Target Dates in 401(k)s: Which is Better?

    A common question is whether or not plan participants should choose index or target date funds in a 401(k). The answer depends on different scenarios.
  4. Investing

    6 Reasons Why Every Investor Should Consider ETFs

    Once you understand the benefits of ETFs, you’ll see how they could be an exciting and smart way to help meet your financial goals. Here some key facts.
  5. Term

    What's an Investment Advisor?

    An investment or financial advisor makes investment recommendations and analyzes securities.
  6. Entrepreneurship

    How to Prep Your Business for a Sale

    Once you have a clean, stand-alone business with solid finances, it's time to put a price on it. Here are the steps needed to prepare for a sale.
  7. Investing News

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  8. Investing Basics

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
  9. Investing Basics

    Explaining the High-Water Mark

    A high-water mark ensures fund managers are not paid performance fees when they perform poorly.
  10. Investing Basics

    Explaining Front-End Load

    A front-end load is a commission or sales charge paid by the investor at the initial purchase of an investment.
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Dividend Payout Ratio

    The percentage of earnings paid to shareholders in dividends. ...
  3. Weighted Average Cost Of Capital ...

    A calculation of a firm's cost of capital in which each category ...
  4. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  5. Organizational Behavior - OB

    Organizational Behavior (OB) is the study of the way people interact ...
  6. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
  1. How do a corporation's shareholders influence its Board of Directors?

    The 21st century has seen a rapid increase in shareholder activism, such as the general awareness, involvement and influence ... Read Full Answer >>
  2. How long does it take to execute an M&A deal?

    Even the simplest merger and acquisition (M&A) deals are challenging. It takes a lot for two previously independent enterprises ... Read Full Answer >>
  3. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  4. What are some common accretive transactions?

    The term "accretive" is most often used in reference to mergers and acquisitions (M&A). It refers to a transaction that ... Read Full Answer >>
  5. What action is the SEC likely to take on 12b-1 fees?

    The Securities and Exchange Commission (SEC) may take action to impose greater regulation on how 12b-1 fees are used, or ... Read Full Answer >>
  6. What is considered a reasonable 12b-1 fee?

    A reasonable 12b-1 fee is generally considered to be 0.25% of the assets of the mutual fund. The maximum amount allowed for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!