Share and Share Alike
The power of followership cannot be overrated. A hackneyed phrase, "strength in numbers" can and has been used to desired effect by shareholders for their benefit. The shareholders themselves can also be large institutions, such as public employee retirement systems. The recent results for say-on-pay at various annual general meetings are but one example. Management misdeeds and corporate fraud in the early and late 2000s led to the passage of Sarbanes-Oxley (2002) and Dodd-Frank (2010) legislation that has empowered shareholders to some degree. Here is an overview of the mechanics of shareholder voting and its true motivation.
Shareholder activism is expressed through the proxy statement. More than mere ballots describing a particular issue to a shareowner requesting him or her to take action, proxy statements are assets as the decisions that they ask stockholders to make impact the value of their company. Voting on these matters is akin to taking a decision on a referendum at the ballot box on the merits (or lack thereof) of a political candidate. Investors need to do their homework, rather than merely rubberstamping management's recommendations. Once they have done so, they have the choice of completing the card accompanying the proxy statement and mailing it in or attending the annual general meeting to vote the shares in person. The latter option may be preferable if issues to be discussed are particularly important.
In this way, the shareholder is able to ask questions, the answers to which may inform his ultimate decision. While management often files the proxy statement, outside parties may do so as well. The latter's interest may differ from management. Investors should note that whereas public companies are required to file an annual proxy statement, investment companies, by contrast, only do so when a specific issue needs to be put before the shareholders.
Requisite disclosures are part of every proxy statement, varying by the issue at hand:
- Types of voting shares must be disclosed and the control accorded to each share class, along with disclosure of ownership by management and individuals with greater than 5% of outstanding shares.
- The independent public accountant must be disclosed, fees paid for audit services, and records kept of any disputes and whether firm representatives will attend the AGM. The investor should look for any sign that independence and objectivity on the part of the auditor is somehow compromised.
A summary of typical proxy proposals and their required disclosures:
|Election of Company Directors||Names, ages, tenure, role(s) in the company, business relationships with the company, meetings that the board held in the past twelve months.|
|Remuneration||A clear description of who gets paid what for their respective roles (e.g.(non) employee directors)|
|Executive Compensation||Plan features, eligible persons, funding links to service (e.g defined benefit plan), prices, expiry dates, strike prices of warrants, rights or options, which do (not) require shareholder approval, tax consequences to the company/recipient.|
|Capital Structure||Title, amount of securities to be issued or modified, fee for the transaction and anticipated use of funds; financial statements with management\'s discussion of financial condition.|
|Corporate Actions (mergers, acquisitions, spinoffs, etc.)||Transaction details, financials of acquirer and acquired companies, discussion of effects of the corporate action, financials.|
|Property Acquisition or Disposition||Type and location, fee paid or received, including basis therefore, name and address of seller or buyer.|
|Restatement of Financial Accounts||The type of restatement and when effective, rationale for restatement and date anticipated resultant effect on company accounts.|
|Investment Advisory and Fee Changes||A table with current and anticipated fees (e.g advisory, transfer, custody)|
|Distribution Fee Changes||The 12b-1 fee rate, to whom the fee may be paid and the payment amounts to those affiliated with the fund or advisor.|
|Investments Permitted/Strategy||A clear description of the change in permissible investments or strategy.|
Investors should look for potential conflicts of interest. Are the interests of management sufficiently aligned with those of shareholders?
Shareholder activism is an outgrowth of corporate governance. Company directors are supposed to mind the store. If they do not, it is the responsibility of shareholders to step forward, weigh the merits of proposals and vote accordingly.
In Whose Interest?
Traditionally a tool for exacting changes in the public company to benefit shareholders, shareholder activism is not without its critics who contend that certain interest groups stand behind the aegis of corporate democracy to advance (an) agenda(s) that might not necessarily benefit the shareholder, such as the pursuit of public policy initiatives and legislative or regulatory agendas. Socially responsible investment funds (SRI) may have a reform-minded, rather than profit-maximizing goal (e.g. environmental issues, human rights, practices that accord with religious beliefs, such as Christian values and Islamic finance).
The number of shareholder proposals is a function of a company's industry. Energy and mineral companies with the ability to harm the environment would, ceteris paribus, come in for greater criticism than technology groups. At issue in the maelstrom of shareholder activism is whether certain proposals advanced properly fall within the remit of a shareholder vote. Might they not be better resolved at the ballot box? A practice referred to as interest-group capture uses the share vote where the legislation might be a preferable alternative. Some examples of this are proposals on corporate political spending and the Taft-Hartley plans' share votes to obtain concessions from management.
The Bottom Line
When evaluating any proposal, the investor needs to ask the right questions. What does the proposal ask him or her to evaluate, who is putting forth the proposal and, ultimately, whom does it serve? The answers to these questions will determine who truly benefits from such proposals.
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