Educating Investors Through Leading
Posted by James McRitchie, CorpGov.net, on
Friday, May 17, 2019
James McRitchie is the publisher of CorpGov.net.
Bias in the world of
politics has spread to proxy voting controversies. A recent
paper by the Spectrem Group
purports to be “providing a voice to retail investors on the proxy
advisory industry” by employing a survey, which seeks to “educate”
respondents through leading questions. The report’s catchy title is
Exile of Main Street: Providing a Voice to Retail Investors on the
Proxy Advisory Industry.
Bias Feeds Off Itself
One technique used by the Spectrem Group is to quote previously
found that in 2017, “A limited group of shareholders has submitted the
overwhelming majority of shareholder proposals. Just three individuals and their
family members sponsored 25 percent of all proposals.”
Although presented as representing the universe of proxy
proposals, the Proxy Monitor database contains only a select list of issuers. In
Insight‘s database follows proposals at all public companies in the
United States. A quick search of Proxy Insight’s database found that out of 611
proposals in 2017, the three individuals and their families mentioned by Proxy
Monitor (myself included) sponsored 110 or 18%, not 25%. Left out of Proxy
Monitor’s analysis is that those proposals averaged 38% support, compared to an
average 33% for proposals from all proponents.
Reliance on Character
The Spectrem Group follows the above mentioned quote with the
following completely unsubstantiated allegation:
Thus, it would appear that a small number of conflicted parties
may be using low retail shareholder voting interest or participation to leverage
their influence in ways that run directly contrary to the preferences of those
How are the three individual shareholders and their families
“conflicted” and how do their proposals “run directly contrary” with the
preferences of shareholders? Levels of support for our proposals is generally
higher than those presented by other groups, so do not “run directly contrary to
the preferences” of shareholders. The paper provides no evidence supporting its
The report contends that “91 percent of retail investors
indicated a preference for wealth maximization over political/social
objectives.” Investment objectives involve more than binary choices yet survey
respondents were asked to choose between “Fully pursue social/political
initiatives” and “Fully pursue maximizing returns.” Given that choice, what
person saving for retirement or education would choose to “fully pursue
social/political initiatives” with their investments?
Most people attempt to balance earning a good return with doing
no significant harm, although each person may have different values. For
example, one may choose to avoid investing in a company that makes a substantial
portion of its profits from slave labor because they find the practice
repugnant, while another avoids producers of cancer causing chemicals because
potential corporate liabilities might harm profits. We all have a multitude of
values and means of expressing them. Many want to earn money through their
investments, while also making the world a better place.
All investment funds I know of seek profits; I do not know of any
whose primary purpose is to support social or political initiatives.
Labeling is Not Educating
Upon completion of the survey, which included industry context, we not
only discovered that a large majority of investors support SEC oversight; we
found that more than three quarters of investors became more supportive of SEC
oversight. This highlights the critical roles of education and communication in
informing retail investors
One example of such “education” is around the issue of using the
advice of an advisor with regard to proxy voting. The survey asked respondents
how informed they feel they are on proxy advisory firms. Only 6% felt they were
very informed. Here is where “education” came in. Those surveyed were asked
about “potential issues,” such as “robo-voting.” Only 5% responded they were
very familiar with “robo-voting” but when asked if they were “concerned” about
robo-voting, 41% answered they were “very concerned.”
Few respondents professed to know anything about “robo-voting.”
The survey then presented “robo-voting” as a “potential issue.” Robo-voting
sounds like robocalling
It is not surprising that 41% of respondents were “very concerned” and 27% were
“moderately concerned.” But the definition of robo-voting is never explained in
the survey, other than to label it a “potential issue.” Potential issues, by
definition are not good.
What is “robo-voting?” That is hard to tell. My guess is that it
is a term like zombie
proxy proposals that has been market tested by a group like the U.S.
Chamber of Commerce and found objectionable enough to drive public opinion.
Think “death tax” as a substitute term for estate tax.
Institutional investors hire proxy advisors to help them research
issues and items that appear on corporate proxies, as well as to utilize their
voting platforms. Many funds have investments in thousands of companies. They
need to vote at hundreds of companies a day during the short proxy season. See
Exhibit 1 below from Morningstar.
Many proxy advisor clients provide their proxy advisor(s) with
proxy voting guidelines, which the advisor uses to pre-populate voting
instructions on the ballot. When ballots are ready for review, clients are
alerted. They can choose to restrict submission until specified client personnel
review and approve the votes or vote automatically, with the opportunity to
review and change votes until the voting deadline passes.
Voting results often mirror proxy advisory recommendations
because recommendations are based on input from clients and commonly accepted
governance principles. To call this “robo-voting,” driven by the power of proxy
advisors, demonstrates a lack of knowledge the process. If I tell you to vote in
favor of all proposals of a specific type, like declassifying the board, and you
comply, that is simply following my instructions and should not be considered
problematic like unwanted robocalling.
Although the Spectrem Group claims to measure “if retail
investors unaware of proxy advisory issues would change their level of support
for SEC oversight as they became more knowledgeable,” the report is a better
measure of market testing terms, such as “robo-voting” to sway public opinion. I
could go over the other four areas identified by the study as “potential
issues.” The result would be to highlight similar leading questions and what
appear to be opaque motives.
The report is not without redeeming value. There were a few less
leading questions aimed at driving retail shareholder participation. For
example, one question asked, “Which of the following would increase your
likelihood of participating in the proxy voting process?” Additional education
(42%) and better communication and coordination among proxy participants (40%)
would make investors more apt to participate.
Unmentioned by the report is that the SEC does little to inform
shareholders of their rights to file shareholder proposals or vote proxies. Most
is devoted to investors as consumers, not as owners. The focus is on protecting
investors against fraud. There is one
page on shareholder voting. The last update appears to have been in
2012. While the page discusses the mechanics of voting, it says little to
nothing about how to research proxy voting items.
Additionally, the survey found investors favored receiving more
information on how proxies are voted by asset managers on their behalf. Only 33%
of those surveyed indicated “Current vote disclosure from asset managers is
sufficient.” That may be the study’s most significant real finding.
Most of those surveyed by the Spectrem Group will never vote
proxies. They hold their “shares” through mutual funds and ETFs. Since 2003,
funds have reported their proxy votes but do so long after news coverage of
annual meetings has passed. Votes are filed with the SEC in a format that is not
sortable or user friendly.
If the Spectrem Group and J.W. Verret really want to empower
retail investors, they should advocate real-time proxy vote disclosure in a
sortable format. Those holding shares would then be more likely to vote because
of improved knowledge of how and why funds are voting as they do.
Additionally, fund investors would be able to move their money to
funds that vote in alignment with their own values. Many would try to invest
with funds that vote solely to “maximize shareholder value,” as J.W. Verret
Spectrem Group appear to advocate. Others would try to invest with funds that
vote for environmental, social and governance (ESG) improvements for better
long-term prospects. Why not let the market decide?
Providing more such information would make markets more efficient
and would put Mr. and Ms. 401(k) and Main Street investors in the drivers seat.
See my Draft
Petition to SEC for Real-time Proxy Vote Disclosure at SSRN or at CorpGov.net.
Compare the sortable disclosure of Trillium
Asset Management under the “Search Proxy Votes” tab, which even
includes the rationale for each vote, with that of the Vanguard
Index Trust Total Stock Market Index Fund, which makes it difficult
to determine voting trends.
The Spectrem Group’s next survey should ask if investors want to
see the proxy votes of their mutual funds and ETF’s before they are due or a
year or more after they are counted. Why not ask if investors want those records
in unsortable pdf format or in a sortable database to facilitate comparison? We
can guess how most investors would respond.
Group, “Exile of Main Street: Providing a Voice to Retail Investors on the Proxy
Advisory Industry,” 2019, graph on page 12. Available
Manager Research, “The Proxy Process: Raising the Investor Voice to Address New
Risks,” February 2019, page 3.
Spectrem Group, “Exile of Main Street: Providing a Voice to Retail
Investors on the Proxy Advisory Industry,” 2019, graph on page 8.
4 Spectrem Group, “Exile of Main
Street: Providing a Voice to Retail Investors on the Proxy Advisory Industry,”
2019, graph on page 8. Available
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