Internet Shareholder Activism, Part II (Archive)
Clarifications & More
Shareholder activist Mark Latham, whose work was covered in Part I, offered some clarifications and additional thoughts to IFBW . Latham’s Corporate Monitoring Project champions a new system of proxy voting in which shareholders elect proxy advisory firms at management’s expense to offer independent voting advice. He wrote:
I think you did a great job covering this important issue and presenting many viewpoints…A few points of clarification & response:
You write, “Virtually without exception, the managers of these institutions [mutual funds, pension funds and other institutional investors] vote the proxies according to management’s recommendations…” I think that describes voting by individuals (at least, by those who do vote) but not by institutions. We’ve seen many shareowner proposals get majority votes on rescinding poison pills and de-staggering director elections. I believe those anti-management votes mostly come from institutions, not individuals. It’s the individuals’ votes that management has in their pocket, because individuals are less informed.
We don’t disagree that institutional investors have increasingly exercised independent thinking on corporate governance proposals. Our point concerned the widespread failure to give equal consideration to shareholder proposals on social and environmental matters.
We described Latham’s advocacy of software that would allow shareholders to access proxy voting advice from firms of their choosing. We misrepresented Latham as advocating a system in which a shareholder could “delegate automatic voting authority to a proxy advisory firm whose judgment they trust.” Latham clarified:
I don’t advocate delegating voting authority. In the system I envisage, the investor’s software only reads the proxy advisory firm’s advice. No voting authority is given to the advisor. The investor controls her own software. The software transmits the investor’s vote, and the advisor never sees the vote, has no idea who chose to follow their advice and who didn’t. The investor can set the software to automatically follow one advisor’s advice, or change this at any time, or override the advice on particular issues.
Latham responded to his critics who charge that a proxy voting firm’s advice can never be truly independent as long as corporations pay for their services.
My main response…is that although management writes the check, shareowners choose the advisor and each advisor sets its fee in advance. This leaves management no formal power to influence the advisor. They could try bribery on the side, but they could do that in the present system too. In my system, there will be more competition among advisors, and more advisors. Competition for shareowner votes will keep advisors loyal to shareowners. By contrast, shareowners do not [currently] choose the auditor by competitive vote. They only rubber-stamp management’s choice.
The Corporate Monitoring Project’s proposals at Washington Mutual and Whole Foods (WFMI) requesting that the firms hire a proxy advisory firm chosen by shareholders received 4% and nearly 9%, respectively. Versions of the proposal have been submitted at Cirrus Logic (CRUS) and Oregon Trail Financial (OTFC). Trillium supported the proposal; Latham reported that the California Public Employees Retirement System (CalPERS), Domini Social Investments, Institutional Shareholder Services and Proxy Monitor did not.
^^ RETURN TO TOP ^^
More on the Muddy Waters of Web Site ReferencesIn the March issue, we called for opposition to reverse a 1998 Securities and Exchange Commission (SEC) decision that allowed the Templeton Dragon Fund to omit a reference to a proponent’s web site address in the body of a proposal. The SEC stated that the reference “may” violate the proxy voting process in that web sites are constantly altered documents and exceed the 500-word limit. But the exact parameters of this ruling are unclear, however; proposals containing web site references have appeared on corporate ballots since the ruling. In any event, we believe that the SEC should view the subversion of the 500-word limit as a good thing. Few complicated issues can be explained in 500 words or less. Moreover, corporations, of course, could use their own web sites to explain their opposition to a proposal, which they often do now indirectly anyway.
A Corporate Governance Agenda for Social InvestorsIn an e-mail to IFBW, corporate governance activist James McRitchie firmly emphasized that socially concerned investors must make corporate governance reform an essential component of efforts to strengthen their influence on corporate behavior. Without corporate governance reform, he writes, “shareholder voices will remain weak.” A top priority, wrote McRitchie, should be the enforcement of the Department of Labor policy (held since 1988) stating that voting rights must be voted in the interests of members and beneficiaries, not plan sponsors. “That rule,” writes McRitchie, “which has never been enforced, should also be applied to mutual funds and other institutional investors who, along with pension funds, hold $6 trillion in funds from American workers.”
A second priority, according to McRitchie, should be supporting a proposed Securities and Exchange Commission rule that will require investment advisers to explain their voting policies, practices and procedures.
This rule should be supported and commentators should seek to extend the proposal to require full disclosure of votes. How can we hold our pension and mutual funds accountable unless we know how they vote? This is critical because most workers don’t have nearly as much invested in direct stock as we do in pension and mutual funds. If our own funds are voting against us on proxy issues, we will never win.
McRitchie’s further advice to social investors:Is Pass-Through Voting Such a Good Idea?In Part I of this article, we discussed the likelihood that Internet-compatible software could afford the means for mutual fund shareowners and pension fund contributors to bypass their fund managers and vote proxies directly. Corporate governance activist James McRitchie shared his response to such “direct democracy”:
Although this is now technological feasible, I believe we will have much more clout if we can unify plan participants and get our fund fiduciaries to negotiate with corporate management and vote in our interests.
In addition, we need a third-party provider to consolidate the voting advice of Domini, CalPERS and others who will surely follow, such as Citizens Funds*. Portfolio trackers should point to this voting advice and allow shareholder to hold this information open while they electronically vote their own shares. Alternatively, for the even lazier voter, just as we can currently “vote with management’s recommendation,” in the future we should be able to vote with one of these funds where our holdings overlap.
Adam Kanzer, legal counsel for Domini, opposes pass-through voting on both practical and theoretical grounds.
Practically, small shareholders will just not vote [if they are overloaded with proxy proposals and proxy advisory firms’ advice]. Large shareholders will, and institutions will form blocs and exert undue influence. Under the present system, we vote our shares according to published guidelines. Small shareholders get the same representation as large shareholders. This [proposed] system obviates the need for voting guidelines, and weakens the influence of socially responsible fund managers. I’d prefer compelling managers to simply be transparent about how they are voting and why, and allowing shareholders to choose the manager with whom they agree.
Burying people in thousands of questions will not advance corporate responsibility. Transparency [by fund managers] is the key. The public wouldn’t be so apathetic if they knew what was going on. When they see their mutual fund voting against some slave labor resolution – perhaps that will make a difference, and prompt them to ask why.
The SEC prohibition against using the resolution process to nominate directors must go! The only way shareholders can run candidates is to pay for a solicitation, while current management uses our funds to tout their candidates on the company proxy. The current system is like voters trying to run a state government by proposition. We need our own elected leaders on corporate boards!
Broker voting should be eliminated. Currently, if shareholders don’t vote their proxies within 10 days of the annual meeting, their broker will vote for them, always in favor of management’s recommendations. American shareholders find it nearly impossible to vote their proxies in elections prior to their broker ‘voting on their behalf.’
^^ RETURN TO TOP ^^Internet Shareholder Activism in ActionOf the new small-cap Allied Owners Action Fund and its companion web site eRaider.com”!, the New York Times asked, “will this be the face of 21st century shareholder activism?” The fund’s plan of action is to pursue a corporate governance agenda at target companies while simultaneously using its web site to build a network of shareholder allies who will help pressure the firms improve shareholder value. (E-Raiders’ slogan is, “if they don’t take care of business, we will,” and its web site motif, cannons and pirate ships.) On April 28 the fund announced its first raid, aimed at target company Employee Solutions (ESOL), a professional employer organization in Phoenix. Having acquired 5% of the shares, Allied suddenly had new clout with management and forced significant reforms. What differentiates this fund from other raiders? Thirty-six paid internet bulletin board moderators. The E-Raider site has even become a locus for organizing at companies not even owned or targeted by the AOAF.
Internet Activism at IBM
Another tale of victorious internet activism, while not of the shareholder variety, should nonetheless inspire socially concerned stockholders. As reported in Business Ethic’s 1999 year-end issue, IBM employees turned to the internet to organize opposition to management’s attempts to switch to a cash-balance pension plan that would have dramatically cut employee benefits. From that web site, another was spun off as a forum for organizing union representation. Hundreds have attended organizing meetings which have brought together a cross-section of employees.
The Equality Project, which files shareholder resolutions to encourage progressive workplace policies toward lesbian and gay employees, posted on its web site contact information for all 50 state public pension funds, and the top institutional shareholders of ExxonMobil, the recipient of one of its resolutions this spring. To our knowledge, this use of the Internet to generate pressure on institutional investors by individuals around a specific proxy proposal is a first in the realm of social and environmental shareholder activism. The Equality Project’s organizers (who include this writer) are unsure as to how much impact the Internet campaign had on the final vote, which increased by 35% over the previous year. “It’s hard to say because our web campaign began later than we had hoped,” yours truly told IFBW.
To be continued, surely…Watch this space for updates.
* The Domini Social Index Fund and CalPERS are two of the very few institutional investors that post their proxy voting guidelines on-line. Trillium Asset Management will soon be posting our votes online.
ACTION ALERT : Lobby the SEC to Expand Disclosure Requirements
Although the formal deadline for comments was in mid-June, we encourage hardheaded activists to write to the SEC in support of a proposed rule requiring mutual fund advisors to disclose how they voted on proxy issues. In your letter, urge the commission to require that funds disclose actual proxy votes cast, the reasons for those votes, and an explanation as to why votes not cast did not undermine share value.
For more information, see www.sec.gov/rules/proposed/34-42620.htm.
Comments can be submitted electronically at firstname.lastname@example.org, or by writing to:
Jonathan G. Katz, SecretarySecurities and Exchange Commission450-5th Street NWWashington, D.C. 20549-0609
RE: File No. S7-10-00, Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV
Excerpts from the proposalItem 16. Proxy Voting Policies. Item 16 would require advisers to disclose their proxy voting practices. This would be a new disclosure requirement, which we propose to add so that clients will be fully informed about who is responsible for voting their proxies and how their interests in proxy voting decisions are protected.
We propose to require advisers to state whether they vote proxies for clients.1 Advisers that vote client proxies would disclose their voting policies, practices, and procedures.2 These advisers would also explain whether a client can direct the vote in a proxy solicitation, and whether clients can find out how the adviser voted their securities on a given issue.3 Advisers that do not vote client proxies would explain how clients will receive proxies (for example, directly from a transfer agent or custodian or through the adviser), and whether the client can discuss particular proxy solicitations with the adviser.
1. Without appropriate disclosure, some clients may incorrectly assume their adviser is voting their proxies.
2. In some cases, advisers have conflicts of interest in voting proxies. For example, the adviser may manage money for a public issuer and may recommend that its other clients invest in the issuer’s securities. The public issuer client may want the adviser to vote proxies in a manner that conflicts with the best interests of the adviser’s other clients. Or, an adviser’s affiliates may have a substantial business relationship with an issuer in which advisory clients invest, and those affiliates may pressure the adviser to vote in favor of the issuer’s management. Many advisers already have policies designed to protect their clients’ interest in these circumstances. Proposed Item 16 would require the brochure to disclose those policies.
3. We understand that advisers to ERISA (Employee Retirement Income Security Act) plans may be required to maintain voting records for individual proxy solicitations on the client’s account, and to provide the plan fiduciary with those records. See Department of Labor Interpretive Bulletin 92-4 (July 21, 1994).