The Power of the Proxy

Bringing Change One Vote at a Time

In the wake of corporate scandals at Enron and elsewhere, stock market investors are becoming increasingly aware of the power of voting their "proxies" (something like absentee ballots) to help steer corporate decision-making. Anyone who owns a single share of stock in a publicly traded company can weigh in on a variety of resolutions on corporate governance and social and environmental issues, making this proxy voting an increasingly important tool to nudge companies toward cleaner and greener behavior.

© Elizabeth Prager

"The continuing corporate scandals have shown individual investors that they have to pay attention to their investments and that they have rights and responsibilities as shareholders," says Michael Passoff, associate director in the Corporate Social Responsibility Program at As You Sow, a California-based nonprofit dedicated to promoting environmental protection and corporate accountability.

"Government has been an ineffective watchdog of corporate abuse and more investors are waking up to the fact that they can engage managementdirectly through the proxy process," Passoff adds.

By Proxy

The U.S. Securities and Exchange Commission (SEC) mandates that American corporations communicate with and solicit feedback from investors. Most companies fulfill this obligation by holding annual meetings at which shareholders can help guide management decisions with votes on various resolutions. Those shareholders who attend annual meetings can vote in person, while others must vote "by proxy" through the mail, telephone or Internet. Companies usually mail out proxy ballots in the early spring in anticipation of upcoming annual meetings.

But just because these ballots are sent out doesn’t mean they are easy to understand. "Proxy statements, by nature, are lengthy and graphically unappealing, with big blocks of text and few pictures," says Barbara Whelahan, a columnist for the financial website "They’re designed to make your eyes glaze over," she says. Many shareholders chuck such materials right into the circular file, perhaps not realizing they are throwing away their only chance to make their voices heard on important corporate issues. Corporate managers are allowed to vote on behalf of those shareholders who fail to respond, so perhaps it’s not surprising that the ballots appear to be in hieroglyphics.

Mark Latham, a Wall Street veteran who founded the Corporate Monitoring Project to improve shareholder oversight of corporate management, warns that another pitfall of proxy voting is to cast one’s ballots "along party lines," that is, according to recommendations laid out by a company’s management team. "The interests of management often conflict with our interests as shareowners, which is why we have proxy votes in the first place," Latham says.

Bloc Voting

Further confounding advocates for shareholder rights is the fact that brokers, such as the mutual funds that currently dominate the personal investing scene, usually vote in large blocks on behalf of shareholders they represent. "These broker votes overwhelmingly follow management’s recommendations," says Latham, who considers the practice a corporate form of ballot stuffing.

But with the 2002 passage by Congress of the landmark Sarbanes-Oxley Act, mutual funds and other representative brokers must now reveal their proxy voting records for public perusal. This increased transparency makes choosing a mutual fund that much easier for individual investors. "If you’re not happy with how they’re conducting themselves, vote with your feet," says columnist Whelahan.

As You Sow is working to make the process of proxy voting easier for investors through the ProxyInformation. com website, which explains the pros and cons of selected resolutions up for votes at various companies. The website also gives visitors an overview of how the proxy voting process works and why it represents an important check on corporate management in the "Proxy Voting 101" section. The organization also publishes its annual Proxy Season Preview highlighting and providing background on a handful of important resolutions at large companies.

According to Passoff, As You Sow takes proxy voting seriously because it doesn’t take much to get a company’s attention. "A resolution receivingfour to six percent of the vote may gain considerable attention from a company [while] votes from 10 to 15 percent are virtually impossible to ignore and usually result in action," he says. "While all resolutions strive to gain as high a vote as possible, the main goal of shareholder activism is to move a company to take action."

Columnist Whelahan applauds As You Sow’s efforts in shedding more light on the proxy voting process. He stresses that like-minded shareholders who educate themselves about various resolutions can make a big impact by simply voting their proxies. "Small investors" best chance to make a difference, collectively, is by voting their proxies," she concludes.

RODDY SCHEER is based in Seattle, where he makes his proxies work for good causes.