Harnessing the power of proxy to expand the voice of shareholders
Individual investors normally feel powerless at shareholder meetings, but one man is trying to rally them together through a "Global Proxy Exchange."
New York — Say you’re a small investor fuming over falling stock prices or irate over grandiose executive pay. Amid this spring’s proxy season, when many companies hold their annual shareholders’ meeting, you may wonder whether your beefs will get much airing.
The typical answer is “no.” Many don’t bother to vote via the proxy card that companies send out. Even if individual investors attend shareholders’ meetings and bone up on issues such as executive pay and the election of directors, they’re still dwarfed by big institutional investors with much greater voting power.
Dwarfed, that is, unless they band together.
“Owners of corporations lose control over the companies they own,” he says. And “that gives management free rein to run the company in their own interests.”
His solution: A system in which individual investors could assign their proxy to an entity – a like-minded person or organization – that would vote for them. Mr. Holton hopes to make this massive plan work through what he calls a “global proxy exchange” (GPE).
With shareholders angry about everything from falling stock prices to executive compensation, this is arguably the best time in decades for activists to challenge the way corporations handle proxy votes.
In April, shareholders of Royal Bank of Scotland Group PLC voted against the bank’s 2008 compensation plan by a margin of 9 to 1. Minneapolis-based Target Corp. is having to defend its board against a shareholder’s rival slate of directors. Federal bailout recipient Citigroup also faced a stockholder revolt against several of its directors in April.
Other companies are trying to head off any backlash before it takes shape. Amgen in Thousand Oaks, Calif., is surveying its shareholders online to get their input on its compensation package. A March survey of 145 companies by Watson Wyatt found that roughly half plan to decrease their pool of bonuses this year by an average of 40 percent.
Lots of experiments are under way. The Toronto Stock Exchange proposed in April that its listed companies would have to seek approval from their shareholders whenever they issued major blocks of shares to purchase another company. A year-old effort called Proxy Democracy (proxydemocracy.org) provides information free of charge on how many institutional investors voted on corporate issues in the past and how some of them plan to vote this year.
“Anything that brings in small investors is a good thing,” says Wayne Shaw, professor of corporate governance at Southern Methodist University’s Cox School of Business. The difficulty comes with “creating a system that embraces every shareholder’s interests.”
One simple way is informational. Letting small investors know how large institutional shareholders are voting can help individual investors decide how they should cast their own vote, says Andy Eggers, Proxy Democracy’s president.
But to Holton, that’s not enough.
“The current proxy system is failing and rendering investors disenfranchised. That problem creates an opportunity for us,” Holton holds. The GPE “is the best way I know of to improve the functioning of corporate America – and repair the obvious breakdown in corporate democracy.”
The automated system would assign an account to all interested investors. Those who didn’t want to cast their own votes – but who did want a voice in corporate governance – would assign their proxies to a third party with the click of a mouse. In turn, third parties could either vote themselves or use the system to assign their proxies to yet another designee.
As this process proceeded, the GPE would collect small amounts of votes and aggregate them into ever-larger voting blocks. From there, a representative would vote at the company’s annual meeting according to how ballots were cast via the GPE.
Eventually, Holton envisions that the proxy exchange would be so integrated into the financial system that, when new customers open a mutual fund or brokerage account, they’d be asked to whom they want to assign their proxy rights.
Not everyone is a fan of the idea.
“I think companies would welcome more small-investor participation, but probably not this type of mechanism,” says Cindy Schipani, business law professor at the Ross School of Business at the University of Michigan. “I think corporate managements think they are doing what’s best and hope small and large shareholders agree and vote their way. They may find a system like this cumbersome and also may have concerns as to whether smaller shareholders would be voting [or transferring their proxy] on an informed basis ... or whether they’re acting on the basis of what somebody else tells them to do.”
Others suggest government oversight.
Perhaps the idea should be regulated by the Securities and Exchange Commission “to ensure that it does represent the small shareholder or not become a ploy or tool of a larger shareholder who uses it to increase his or her position,” says April Klein, professor of accounting at New York University’s Stern School of Business.
Holton says the idea first came to him in 2003 “after years of observing the sorry state of corporate governance.” He wrote about the concept in Financial Analysts Journal in 2006, hoping some deep-pocketed organization would soon seize on the idea and bring it to fruition.
When no one did, he proceeded on his own. In 2007, he formed a grass-roots organization, the Investor Suffrage Movement (ISM), to help implement the plan.
Since then, his efforts – to build the ISM and a proxy exchange – have proceeded little by little. In March 2008, mostly with his own money, he launched the ISM’s website, isuffrage.com. Soon after, he and a few volunteers began to test the process of proxy-granting among themselves. Then, last summer, Holton began organizing a network of volunteer “field agents,” now numbering 20, who would attend corporate annual meetings on shareholders’ behalf. Among their benefits, these shareholder reps can promote shareholder resolutions that hadn’t appeared on the company-provided annual meeting proxy card.
This year, these field agents collectively plan to attend about 30 corporate annual meetings, representing the shareholders who have assigned proxies through the fledgling GPE. Eventually, Holton foresees agents attending every company’s annual shareholders’ meeting.
“We’re not looking to grow that quickly,” says Holton, who owns his own consulting firm, Contingency Analysis. At the moment, “we’re focusing on defining our goals, creating programs and a culture, and incorporating to be a nonprofit organization.”
But over time, “we’ll slowly expand our program by word of mouth. And once we’ve tested and proved that we can handle a mass of participants, we’ll launch an advertising campaign.” That phase, he guesses, could be another two to five years away.
On the financial front, Holton’s organization will need to boost fundraising from what he calls today’s “trickle of donations.” He expects an effort to step up fundraising will come after his organization becomes incorporated as a nonprofit. And when might he realize the goal of, as he puts it, “100 percent suffrage” for America’s shareowners?
“It might be another 10 years,” he says, but “we’re providing a solution” that will empower investors.