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. (See also: 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 have 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.
In the internet age, 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 on.
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 revisions of the proxy voting system—most significantly, allowing shareholders to take an active role in introducing resolutions to the proxy. Today, any shareholder (or group of shareholders) who owns at least $2,000 of a company's stock may introduce a proposal. These proposals are often termed "direct proxy access" and focus most prominently on allowing shareholders to nominate director candidates. On the one hand, this brings 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.
The Bottom Line
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. (See also: Socially Responsible Mutual Funds and Putting Management Under The Microscope.)