Moxy Vote Blog

Who’s between a company and its shareholders? According to the SEC, it’s merely brokers, banks, custodians, securities depositories, transfer agents, proxy solicitors, proxy service providers, proxy advisory firms, and vote tabulators. Here’s the quote from their Concept Release on the US Proxy System:

The manner in which proxy materials are distributed and votes are processed and recorded involves a level of complexity not generally understood by those not involved in the process. This complexity stems, in large part, from the nature of share ownership in the United States, in which the vast majority of shares are held through securities intermediaries such as broker-dealers or banks; this structure supports prompt and accurate clearance and settlement of securities transactions, yet adds significant complexity to the proxy voting process. As a result, the proxy system involves a wide array of third-party participants in addition to companies and their shareholders, including brokers, banks, custodians, securities depositories, transfer agents, proxy solicitors, proxy service providers, proxy advisory firms, and vote tabulators.

In the US, the children’s game is known as Telephone. Elsewhere in the world, it’s known as Chinese whispers, Grapevine, Broken Telephone, Whisper Down the Lane, Gossip, Le Téléphone Arabe, and Stille Post.

Do you know what it takes to get that freshly-baked proxy ballot in your mitts every year? Under the illusion that the company annually queries their shareholder database and performs a massive Mail Merge? Start with the fact that companies don’t even know the names of most of their shareholders, complicate this with the reality that your shares are likely held in your broker’s name, and spread this over millions of shareholders and thousands of companies.

Here’s the SEC’s diagram revealing the complexity of the industry that has evolved under these conditions:

A little more complicated than you were expecting?  Yeah, me too.

“Farming looks mighty easy when your plow is a pencil and you’re a thousand miles from the corn field.”  –Dwight D. Eisenhower

On July 14, the SEC published the Concept Release on the US Proxy System. They occasionally issue these releases, maybe two or three times a year, when they’re considering substantial problems. They want your feedback.

This time around, the SEC describes our current proxy voting system, its consequences on shareholder communication and participation, and the imperfect coupling of voting power and economic interest. From the introduction to this document:

…we are reviewing and seeking public comment as to whether the U.S. proxy system as a whole operates with the accuracy, reliability, transparency, accountability, and integrity that shareholders and issuers should rightfully expect. With over 600 billion shares voted every year at more than 13,000 shareholder meetings, shareholders should be served by a well-functioning proxy system that promotes efficient and accurate voting.

If you have something that might help the SEC think this through, drop them some comments before October 20th. Last November, Moxy Vote formally submitted some thoughts of our own on the challenges posed by the current system and the power of technology to address some of these challenges.

The Problem – Retail Voter Apathy

The biggest challenge that all shareholders face in collectively achieving better corporate governance is the lack of participation by “retail” (i.e., non-institutional) voters.  Approximately 25-35% of shares of public companies are held by individual retail shareholders.  This segment of the shareholder base is notoriously apathetic toward the completion and submission of proxy ballots.

Many reasons are offered to help explain retail voter apathy including the following:

• inefficient voting methods (e.g., paper or telephone)
• no sense of empowerment (i.e., a feeling of “what good will it do?”)
• little available information to allow a thoughtful voting decision
• little knowledge about the process and the right to vote

The Solution: Electronic Voting Platforms

Many institutional shareholders, like mutual funds, vote their clients’ proxies electronically through one of several online voting platforms.  The process is very efficient.  The ballots are delivered electronically to a Web-based application, and the votes are often submitted from within the same application.  Moreover, voters may create “default” proxy voting policies, or standing instructions, so that they do not need to return to the site to vote each ballot individually.  This method ensures that all votes are cast based upon pre-defined user-controlled preferences.

The development of electronic voting platforms for retail investors is the solution to the problems presented above.  Specifically, electronic platforms can provide information to allow investors to make informed voting decisions at the time that they are voting.  Group participation with other like-minded retail voters through these electronic platforms will strengthen the “voice” of the retail voter and empower the voter.  Electronic voting platforms that are seeking a profit will allocate resources to educating the investing public regarding the overall process and its importance in an effort to attract users.  Finally, electronic voting platforms are significantly more efficient than the currently available voting methods and would increase retail participation.

How do we create more and better electronic voting platforms?
There are numerous reasons for why proxy voting platforms for retail investors have failed to develop.  Recently my colleagues submitted a letter to the SEC that details these reasons.  Quickly, though, structural issues present in the industry inhibit the proliferation and effectiveness of the electronic voting platforms.

In our opinion, there is a simple solution, a silver bullet, to most of these issues.  The powers-that-be need to do two things:

1. Require firms that disseminate and collect proxy votes to be capable of delivery to all electronic platforms.
2. Require that all firms comply with the delivery instructions of the voter. Brokers and transfer agents must deliver to the platform chosen by the shareholder, just as they would deliver to a chosen physical address.

While these requirements may seem obvious, they do not reflect the current capabilities of the industry.  Regulators should work to implement these rules in order to force the industry to address its infrastructure issues and open things up.

Requiring firms to “plug in” to all electronic platforms would enable voting for a large block of shares that presently cannot be voted through the existing platforms (i.e., shares that are held “directly” and not through a broker).  Included in this group of shareholders are many participants in company 401(k) plans which are generally treated (for voting purposes) as directly-held shares despite being custodied at a broker.  Without this requirement, electronic platforms are rendered useless for this group of voters, and the apathy problem will persist.

It is of even greater importance for regulators to ensure that a shareholder has full control over the delivery of his/her proxy ballot because there are conflicts of interest among industry participants that could derail the development of electronic voting platforms.  The distribution agents in the industry work for the issuers (either directly or, indirectly, as is the case with broker-held shares).  As such, the agents have the incentive to satisfy these paying customers rather than do what is best for corporate governance.  By giving delivery control to the shareholder, we’d create a proper check and balance on the proxy distribution agents that otherwise may not have incentive to engage with all retail-friendly electronic platforms.