Your asset manager is casting votes for you. What are they doing with that power?
The origins of the proxy vote.
All public companies hold an annual general meeting where shareholders vote on issues ranging from board elections, executive compensation packages, and sustainable practices. Even if you do not attend the annual general meeting, as most do not, you can vote by proxy. For example, I received an email from Shareholder Services Group, my custodian, informing me that I could vote proxy for a stock in my portfolio. I logged in, made my selections and submitted my vote.
If you have never received a proxy ballot before, you are likely outsourcing that task to an asset manager.
You will only be notified to vote if you hold an individual stock such as Disney or Tesla. If you hold a mutual fund, for example, the manager of the fund is voting for you. Approximately 70% of the outstanding shares in the U.S. are owned by institutional investors (mutual, index, pension, and hedge funds).
If you never really thought much about proxy voting, you should take a second look. The proxy vote is the only form of direct communication that most investors will have with company leadership. If you care about your stock's long-term performance, as you most certainly do, the proxy vote is an opportunity to voice your support or concern with the way the company is being run.
If you are thinking that leadership knows best, consider this - there are many cases where a company is aware of an issue, but they have chosen not to address it in a meaningful way. Concerned shareholders who meet certain minimum requirements can file a resolution to make the issue public and bring it up for a vote.
Shareholder resolutions have generated positive change.
Here are a few recent examples to demonstrate the power of shareholder resolutions and voting proxy.
Shareholders filed a resolution in 2017 with Kraft. They were concerned about reputational risk and the environment. Kraft was not addressing the fact that the production of palm oil in their supply chains was resulting in deforestation. The resolution was withdrawn when the company committed to address the issue publicly. You can read Kraft's commitment here.
As you Sow, a non-profit focused on shareholder advocacy, filed resolutions with Starbucks for several years. Concerned about reputational risk and the environment, it asked Starbucks to be more transparent and targeted with their sustainable packaging initiatives in 2010, 2011, 2018, and 2019. The same resolution was filed again in 2020 and withdrawn when the company made a commitment to be more transparent. You can read Starbuck's commitment to sustainable packaging here.
A common shareholder resolution is to ask that the CEO and Chairman be two different people. The Chairman oversees the Board of Directors. That is a conflict of interest given that the Board of Directors is supposed to be independent. They keep the CEO in check and vote on items such as CEO pay. The separation of the these two positions is a basic component of good corporate governance or the "G" in ESG (environmental, social, and governance factors.) In 2018, shareholders filed a resolution for Rite Aid to separate the positions and it passed with enough votes.
From concerns about cybersecurity, climate risk, governance measures related to opioids, or promoting diversity in the board room, shareholder resolutions cover a variety of topics - all with the goal of reducing risk and improving the company's long-term performance.
If you could choose an asset manager who was more actively supporting resolutions in line with ESG factors, would you?
BlackRock, Vanguard and State Street hold about one fifth of the S&P 500 through funds they run for investors. They are voting for you - institutional investors have significantly higher voting participation (91%) than retail investors (29%) - but they have mostly voted in line with what the board recommended. If you have never seen a proxy ballot, the SEC has an example for you to review. Essentially there is a list of the resolutions proposed for the year along with how the Board recommends you vote.
There are indications of change brewing. Blackrock and others have said publicly that they are now willing to vote against management with regards to ESG resolutions that will drive a more sustainable business. Similar to tracking the voting history of politicians, the voting history of asset managers is starting to be synthesized in a way that investors can get an understanding of whether they are staying true to their word. For example, Morningstar recently published a report analyzing fund families' voting records. DFA and Voya ranked among the worst with regards to ESG issues and DWS and Allianz among the best.
The asset managers themselves are realizing that investors are watching their voting history. Some managers, such as Fidelity and Capital Group, have in-house teams that review proxies, while others outsource to a proxy advisor, such as Institutional Shareholder Services (ISS).
In this crowded, increasingly commoditized industry, the investment company that has the better voting record when it comes to ESG factors may have an opportunity to differentiate itself.
Given that an S&P 500 Index fund is a commodity that can be purchased cheaply, virtually anywhere, why wouldn't investors choose the asset manager (Blackrock, Vanguard, etc) that tend to support ESG factors? Thousands of studies show that integrating ESG factors is good for business. Investors can demand more from the people that invest and hold their money - they just haven't realized it yet. Thanks to Morningstar and others working to bring voting records to light with more transparency, it is only a matter of time that the proxy vote will get the attention it deserves.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and expats worldwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors. Follow her on Twitter.