Voting Proxies (and Protecting Your Investment) in 60 Seconds or Less

Last Updated Mar 22, 2011 12:16 PM EDT

When the days get longer and warmer, the robins return, and crocuses and daffodils pop up overnight, that means proxy season is here. And these days voting on proposals from management and shareholders is as critical -- and as tricky -- an investment decision as buy-sell-hold.

Don't be intimidated by the flood of blue shrink-wrapped packages, slim, eco-friendly envelopes, and email notices with ANNUAL MEETING in the subject line. If it's worth it to invest in the company, it's worth five minutes to check in to find out what is going on and to provide some feedback to let them know you're paying attention.

Until the 1980's, the "Wall Street Rule" was the investor's mantra: "Vote with management or sell the shares," otherwise known as the "Wall Street Walk." Those were the days when a proxy vote was pretty much limited to approving the directors nominated by management and the auditors selected by management.

Wall Street Rule no longer
But two things happened to change that. First, the takeover era -- remember junk bonds? -- made any size of takeover possible, giving both hostile-bidding raiders and entrenched management a reason to put a whole new category of shareholder-unfriendly items on the proxy card, from coercive two-tier tender offers to dead-hand poison pills and deal-killing golden parachutes. Second, the rise of institutional investors with unprecedentedly large and wide holdings made the transaction costs of taking the Wall Street Walk more expensive than the potential upside of defeating some of these proposals.

Over the past three decades, proxy issues have continued to increase in complexity and impact with a big leap forward as the Dodd-Frank legislation's advisory "say on pay" vote requirement goes into effect. Shareholders have already voted down the compensation at Jacobs Engineering (JEC) and Beazer Homes (BZH) and cast significant "no" votes at Monsanto (MON) and Tyco (TYC).

More significantly, the prospect of a no vote prompted Disney (DIS) to abandon its gross-up provisions for golden parachutes. Gross-ups (paying the executive's taxes) appear to be a welcome casualty resulting from increased (even advisory-only) shareholder oversight, along with greater transparency and clear demonstration of pay-performance link.

Even with the additional complexity of proxy issues, voting does not have to be cumbersome or complicated. Most proxies can be voted online, generally at proxyvote.com, which simplifies the process. These simple steps make it possible to vote most proxies in five minutes or less. Trick number one is to do the first item on the proxy -- election of the directors -- last, because what you learn in voting the rest will guide your decision.

The Five-Minute Proxy Vote
1. Auditors Vote FOR unless
  • The Section 404 disclosure indicates that the company is not able to verify or fix the company's internal controls
2. Compensation Thoughtful, well-reasoned votes on executive pay require time and attention. But the following short-cut will do pretty well for any individual investor. Vote FOR unless 3. Frequency of say-on-pay votes Vote FOR annual review. Pay should be put to an advisory shareholder vote every year.

4. Shareholder proposals
  • Vote FOR proposals from individual and institutional investors relating to governance, board election and eligibility, requiring majority vote in favor for board members, tying pay to performance, enhanced disclosure, and political contributions.
  • Vote as you wish on "social" proposals from religious groups and NGO's. Reminder: even a 100 percent vote in favor is advisory only and management is free to ignore it.
5. Board of directors -- vote FOR directors unless
  • Candidate holds no or merely nominal stock in the company (there's a chart of holdings in the proxy)
  • Candidate has missed more than 25 percent of the meetings (must be disclosed in the proxy)
  • Candidate appears in "related transactions" section of the proxy with relationships that impair objectivity
  • The performance graphs or Wall Street Journal charts show disparity between pay and performance
  • The proxy has sensible-looking shareholder proposals from credible institutional investors like CalPERS, TIAA-CREF, or AFSCME. These investors target their proposals to the least cooperative and worst performing companies in their portfolios. If the board cannot engage constructively with major shareholders to negotiate on governance issues, they have not earned your support.
The One-Minute Proxy Vote
Too complicated? No problem -- this is one time when you are allowed to cheat from your neighbor's paper. You can free-ride on the proxy analysis by checking out how CalPERS voted or get advice from Transparency Democracy or Moxy Vote. You can also send me an email with any proxy issue you find especially thorny or outrageous -- if I can, I'll answer and might even write a blog post about it.

My favorite New Yorker cartoon shows an annual shareholder meeting with two directors in the foreground, looking balefully at a determined-looking woman standing up to ask a question. One of them is leaning toward the other, whispering, "This is the part of capitalism I hate."

That's the best reason to vote your proxies -- not to annoy the directors (though that might be a side benefit), but to remind them that capitalism is named after the people who provide the capital: the shareholders.

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  • Nell Minow

    Nell Minow, a member of the board of GovernanceMetrics International and founder of The Corporate Library, writes about corporate governance issues, focusing especially on CEO pay, executive compensation, shareholder rights and best business practices.You can follow her on Twitter at @nminow.

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