Views on improving the integrity of global capital markets
26 March 2015

Universal Proxy Ballot vs. Proxy Access: Which Leads to Better Board Accountability?


Interested parties got to discuss proxy voting in the United States, as well as proposed solutions to perceived problems concerning the rights of shareholders, at a recent roundtable held by the Securities and Exchange Commission (SEC).

One issue featured in the debate, and one that increasingly bubbles to the top of discussions about shareowners’ ability to nominate directors, is universal proxy ballot.

A universal proxy ballot would give investors voting by proxy the same ability to vote their shares for their preferred combination of nominees (some potentially put forth by the board, some put forth by investors) that they would have if they attended the shareholder meeting in person. Such an occurrence could happen in a proxy contest, in which the board and an investor group may offer different slates of nominees for the board. Currently in a proxy contest, shareholders voting by proxy generally may vote either for management’s slate, or candidates favored by the shareholder proponent. Unless they vote in person, shareholders cannot pick and choose or mix freely from the two sets of candidates. A universal proxy ballot would allow the same kind of “split-the-ticket” voting for those who do not attend the meeting in person (the majority of whom vote electronically) as is now enjoyed by those who attend.

It is instructive to analyze just what a universal proxy ballot would involve in relation to the other hot topic of this proxy season — proxy access.

Let’s briefly look at each, and highlight the differences.

Universal Proxy Ballot

There is still a proxy contest, whether full slate or short slate (investors offer nominees for just a few seats, not the entire board) with all the attached costs. The investor(s) running the proxy contest still have to send out their own set of information to investors, work with a proxy solicitor to ensure they get their information to all shareowners, and take on all the other costs of a proxy contest. The only thing that changes is that investors get one card for voting instead or two — more convenient, most definitely, but not game-changing.

Proxy Access

The investor(s) behind a proxy access effort will simply have their nominees for directors placed on the corporate ballot if they meet certain thresholds (3% owned for three years to nominate up to 20% of the board currently seems to be the most popular). The advantage of proxy access is that all shareowner nominees are placed in the corporate proxy itself, not only on the final voting card. Those behind a proxy access effort, therefore, need not produce their own proxy materials and send those materials out to all investors.

A Better Accountability Mechanism

Proxy access is important as an accountability mechanism, something majority voting for directors was supposed to address, but has not. At many large US companies, shareowners can theoretically vote against board members through majority voting for directors. But majority voting in the United States provides almost no accountability, as the vast majority of those voted off the board do not leave. “Majority voting” policies on many corporate US boards have no teeth, as directors may tender their resignations from the board, but more often than not, the board does not accept their resignation, and keeps them on the board. Majority voting results have, therefore, largely been ignored by companies in the US. Proxy access would allow investors to influence the board (admittedly in a small way) directly — and a board could not ignore them into going away.

The threat of proxy access would bring boards to the table, where currently they can ignore investors if they really want. Forward-thinking boards and companies do meet with investors and listen to them of course — but with proxy access, ignoring the wishes of rational investors with a significant stake in a company wouldn’t be an option. It is important to understand that ignoring irrational investors still would be an option.

Some issuers complain that they would be inundated with proxy access proposals by special interest groups, but this is a red herring. (CFA Institute refutes this and other concerns in a recent research report on proxy access). Any interest group that gets a director or two on a company proxy ballot still has to convince 50% of the votes that their idea is better than that of the board, and even then they only get a fraction of board seats. That is a very high hurdle for “special interest groups” to overcome in order to promote a narrow agenda; 50%+1 is not a narrow agenda.

With proxy access, an investor cannot take over the board, but they don’t want to. A seat at the table can be beneficial. The Activist Investor blog recently penned an edifying article on the impact an investor with a small representation on a key committee can have. Many activists do this — and the power of it is that other investors are watching. If the company gets an activist on its board, that means 50% of the votes support that activist, so if the board ignores that activist it may be doing so at its own peril.

While a universal proxy ballot is useful in a contested election and is a nice thing to have from an investor’s perspective, it is no replacement for a more meaningful change to the current proxy system — namely, the board accountability mechanism of proxy access.

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About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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