The debate about shareholder rights and corporate democracy in the U.S. often omits a key fact: individual investors typically don’t get involved.
When that’s taken to account, the dynamics of issues such as whether to grant proxy access for the director nominees of certain large shareholders take on a different hue.
Rather than a scene where all-powerful corporations and their boards are set against powerless indiviudal investors, who desire a bigger voice, you have in reality a variety of powerful players: companies and their executives, boards, big pension funds, mutual funds and activist investors among them.
The lack of retail participation in corporate governance and a proposal to fix it were the subjects of a recent posting on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
Written by Frank G. Zarb Jr., a partner with the law firm Katten Muchin Rosenman LLP, and John Endean, the president of the American Business Conference, which on its website describes itself as the “voice of the midsize, high-growth sector of the economy,” the article suggests a voting mechanism to encourage individual investors.
First the two describe the current lack of participation in stark terms. “If the voters from an entire region of the country – say the Southwest – did not show up at the polls for presidential elections, most would agree there was a problem,” the authors write.
They say about 20% of individual investors vote their proxies. When companies opt to send email notice that proxy materials are available on the Internet rather than the traditional arrival of thick envelopes full of paper, the participation can drop to 5%. The main reason: people are busy.
The authors suggest something they call “client directed voting.” It’s a bit clunky and I’m not sure how effective it would be. But at least it’s an attempt to address the issue.
Essentially, under the paln, a shareholder would leave standing advance instructions with his/her broker or bank custodian about how to vote on certain topics. They could override their own view in any given situation.
Here’s a provided example: An investor “may normally vote against a shareholder proposal to split the roles of chairman and CEO, voting in favor of such proposals only in a minority of instances, depending on the circumstances. Such an investor could set the default to vote “no” on all such proposals, but then focus his or her research and analysis on potentially overriding that default …”
It strikes me if we are talking about an investor devoting that much time and energy to an issue or any other typical governance matters, that investor probably already is in the voting minority. But credit the two with facing up to the lack of retail participation in corporate governance and proposing a solution.