While proxy voting has grown as a strategy to change corporate policy on environmental, social, and governance (ESG) issues, the pressure for change tends to come more from institutional investors, like pension funds, than from individual investors.
Tracking the Disparity
According to an analysis of 3,379 shareholder meetings held between January 1 and June 30, 2017 by ProxyPulse, a collaboration between Broadridge Financial Solutions and accounting firm PricewaterhouseCoopers, 66% of votes on proposals seeking company reports on climate change were cast by institutional investors, with only 13% of the votes cast coming from individual investors, also known as retail investors.
Votes about increasing diversity on corporate boards of directors showed similar results. ProxyPulse reported that 31% of institutional investors voted in favor of initiatives to increase board diversity, while only 14% of individual investors cast their ballots in favor.
Now consider this: According to Morgan Stanley, 71% of individual investors are interested in sustainable investing. A Schroders study found that 80% of investors would consider moving investments out of companies with a record of poor social responsibility. Given this high level of interest in ESG issues, what accounts for the great disparity in proxy voting?
Unpacking the Problem
One key difference is that institutional investors control the lion’s share of the votes: 70% of shares are held by institutions, compared with just 30% held by individuals. A less obvious (but still crucial) difference is that many institutions are required to vote as part of their fiduciary responsibility to their customers, whereas individual investors are not.
Instead, many individual investors leave their shares in the custody of brokerage companies, which legally cannot participate in proxy voting. Even if an individual investor wants to cast their ballot, voting is often a complicated, time-consuming task that few people are willing or able to undertake.
This point was underscored by Daniel M. Gallagher, who served as a commissioner of the Securities and Exchange Commission from 2011 to 2015. “The cost to an individual shareholder—in time and effort to review scores of pages of proxy disclosure, form a reasoned view on how to vote the proxy, and then undertake the mechanics of casting that ballot—tends to outweigh the benefits of voting,” he said.
Gallagher suggested that companies could better use technology to improve the mechanics of proxy voting. “For example,” he asked, “could we allow individuals to delegate the ability to cast their ballots so long as they are cast consistently with certain voting rules preset by the investor?”
One step in the right direction came in 2003, when the SEC adopted a rule enabling investment advisors to vote proxies, provided that the votes were in the best interests of their clients and that they kept detailed records that are available to clients.
Jill E. Fisch, a professor at the University of Pennsylvania Law School, said that another innovation—standing voting instructions (SVI)—would allow the voices of more individual investors to be heard at shareholder meetings.
SVI allows investors to designate their voting choices in advance of the actual shareholder meeting and have their shares voted in accordance with those preferences. Fisch points out that while institutions have long been able to use SVI, individuals have been barred from using it by the SEC out of concerns that it would result in uninformed voting.
But Fisch said that current technology could allow the creation of digital platforms that enable retail investors to participate in proxy voting while retaining all the safeguards necessary to avoid fraud and other adverse effects.
As ESG issues continue to move to the forefront of investors’ minds, the proxy voting system could become more accessible. In the meantime, individual investors may be able to rely on their advisors and advocate for more accessible voting wherever possible.