ProxyInformation.com: proxyvoting 101

Proxy Voting 101

Here is an overview of proxy voting.

Publicly traded companies are required by law to report to shareholders. They do this through a variety of means, most notably by inviting shareholders to an annual meeting. Prior to the annual meeting, shareholders are sent documents known as proxy statements that include details about the annual meeting, share ownership, board structure, executive compensation and details on other issues that will be voted on at the annual meeting.

The term proxy means “written authorization to act in place of another.” The proxy statement is the document used by companies seeking approval from shareholders of issues relating to corporate governance, recognizing that most shareholders will be voting remotely “by proxy” rather than in person at each company’s annual meeting.

The proxy statement also includes a list of issues to be voted on at its annual meeting. Shareholders are empowered by law to elect board members, ratify the choice of approve auditors, and vote on certain compensation issues. They may also engage in dialogues with management and file shareholder resolutions on corporate governance and social issues which are voted on by shareholders via the company’s proxy.

U.S. Securities and Exchange Commission (SEC) rules allow shareholders to file resolutions with companies on corporate governance, social and environmental issues. The requirements to file a resolution are relatively simple. Any shareholder who owns $2,000 worth of company stock and has held it for one year prior to the annual filing deadline may file a proposal. Proponents of shareholder resolutions are allowed only 500 words in the proxy statement to present their case. Management can take as much space as it would like to respond but there is no opportunity for proponents to respond in the proxy to correct misleading information.

The SEC has set forth a number of rules relating to issues that may not be addressed through proposals. For instance, anything relating to personal grievances or that relates to operations that constitute less than 5 percent of revenue may be excluded. A company may challenge the proposal at the SEC if it thinks the proposal may be legally omitted. Many challenges relate to rules stating that issues pertaining to “ordinary business” may be excluded. But proponents can challenge the company’s logic and if the SEC sides with the shareholder proponents’ argument, the proposal must generally be placed on the company proxy statement and voted on at the annual meeting.

Proposals must receive a minimum number of votes to be allowed on the proxy the following year. Recognizing the difficulty of mobilizing substantial support for resolutions, the SEC has set a relatively low bar for a resolution to qualify for resubmission. Proposals must obtain 3 percent of the total vote their first year to be resubmitted; 6 percent the second year and 10 percent its third year. If it fails to meet these minimum votes, it may not be resubmitted for 3 years.

If you hold mutual funds, you do not hold actual company shares and cannot vote proxies directly. However, you can contact the management of your mutual funds and ask them to vote in favor of issues you feel strongly about. Starting in 2004, all funds must publicly disclose how they vote on all proxy issues.

There are four categories of votes: For, Against, Abstain, and Not Voted (these votes are automatically voted by management). If an investor is unsure about an issue it is best to abstain as these votes are not cast either for, or against a vote and are not counted in the final tally.

Shareholders can vote their proxies via mail, internet, phone, or by attending the annual meeting in person. Voting instructions are provided on the proxy and votes can be changed as long as they meet the stated deadlines (usually 24 hours before the meeting). Those attending the annual meeting in person can change or submit their votes up to the very last minute. Those who do not vote their proxies in advance may have their ballot automatically cast by brokers or management.