When once-great companies like Hewlett-Packard write off a few billion dollars because of an ill-advised acquisition, or the management of one of our investments pays themselves outrageous bonuses, it should alarm us all. Frankly, that money would have done shareholders a lot more good had it been paid out in dividends.
When we buy stock, we buy ownership in a company. If I bought a local Dairy Queen franchise and hired a full-time manager, I would damn sure actively oversee the operation. The same holds true when we own part of ABB, Zenith, or anything in between. Corporate management works for us – the owners – and it is our responsibility to let them know what we think.
How? By being active shareholders. Vedran Vuk, our senior analyst, is going to teach us how to do just that.
Most voting is routine, but when a heated corporate battle unfolds, we want to participate. When that happens, the more shareholders who vote, the stronger the message to management. After all, they are spending our money, so it's better to keep them on their toes.
Corporate Voting for Individual Investors
By Vedran Vuk
One of the perks of owning shares in a company is voting in its corporate elections. However, for most corporate elections, there's no point in sitting on the edge of your seat. They usually involve routine events, such as the reelection of board members and the approval of revised compensation plans. These votes are typically uneventful. However, one of the best-performing stocks in the Money Forever portfolio was recently in the midst of a shareholder battle, and we hoped to influence the upcoming vote.
For the small investor, voting your shares typically makes about as much sense as voting for the Republican candidate in Nancy Pelosi's San Francisco congressional district. You have no chance of changing the election results. It's almost better to just stay in bed on election day.
But from time to time powerful, activist shareholders push to make serious changes to a board of directors. When that happens, you need to know how to vote your shares.
Corporate elections sound important, but the realities of the proxy voting process make elections rather predictable. Compensation plans are nearly always approved unless the company has a history of going overboard. Even if the compensation plan is slightly generous, no one is going to drag out a fight over a CEO being paid $10 million versus $13 million. For shareholders to strike down a compensation plan, there really has to be something in there worth raising an eyebrow over.
Furthermore, unless a board member has done something completely inappropriate, they are usually reelected as well. There is only enough momentum to replace directors when shareholders have serious concerns.
As tradition holds, companies still have annual meetings where shareholders can attend and vote in person (with some important footnotes to the process). However, most of us vote by proxy – meaning someone votes for us. Of course, we still get to choose how to vote; that's what a proxy card is for.How Do I Get a Proxy Card?
Prior to a vote, most shareholders receive a proxy voting card either in the mail or electronically through email. Some online brokerages may also put the voting materials in the "documents" section of your account. Or you may receive a proxy notice. I've included a sample notice below (click here to see an enlarged version):
You cannot vote with a proxy notice. It's simply a one-page notice informing you of the upcoming vote. If you get a notice rather than an actual proxy, you should either go online to vote or request a proxy card from the company.How Do You Vote with the Proxy Card?
Regardless of how your proxy card arrives, you can vote through one of four methods: online, telephone, mail, or in person. Whatever your choice, make sure to keep your proxy card – do not throw it away.
For the online and telephone methods, you need the control number written on your proxy card to identify your shares. Below is a sample proxy card (click here to see an enlarged version). The enlarged card will show you where to find the control number for online and telephone voting:
For online voting, the website address will be provided on the proxy card. Typically, it is a website specializing in proxy voting. At the website, you have to enter your control number from the proxy card to proceed.
The proxy card also includes a telephone number for phone voting. When calling, you need to know the control number found on the proxy card.
In this case, you need to fill out your proxy card by hand and mail it to the address included with the proxy materials. If you received a proxy card through the mail, it likely came with a return envelope as well. The control number is already written on the proxy card, so you don't need to worry about it with this method.
While voting in person at an annual meeting might be the most interesting way to cast your vote, it's definitely the most difficult. It might seem simple, but the technical details create real obstacles.
A shareholder can only vote directly if his shares are registered with the company. That means rather than holding the shares in a brokerage account, you own them directly from the company and hold the physical paper shares. This is a highly inconvenient form of ownership, as selling the shares would involve shipping them to the buyer within three days. Thankfully, with a brokerage account that's not something we have to worry about.
Another way to vote directly is with participation in a direct registration system (DRS) through your brokerage. In this case, shares are registered electronically and can be shifted back and forth between a brokerage and the company. When the shares are shifted to the company, you are allowed to vote directly.
A third option is letting your brokerage know that you plan to vote in person at a meeting. They can give you a special form to fill out with your intention to vote. After sending it back, they will send you a proxy card endorsed by the brokerage to take to the actual meeting. In short, all three of these methods involve unnecessary hassles for something you can easily do online, by telephone, or through the mail.
If you really want to attend in person, you can always go, even if you've already cast your vote through another method. However, if you plan to attend the meeting, let your brokerage know beforehand by following the website address used for online voting and selecting a box that indicates your plans. Also, make sure to bring identification to the actual meeting. If you don't inform the brokerage of your planned attendance and your shares are not registered directly with the company, you will not be allowed to attend, even if you are not voting.Shareholder Activism
Unfortunately, many corporate-governance issues can be complex. Also, companies often try to deceive less-knowledgeable voters. For example, a deceptive proposal might ask investors to vote for a "shareholder rights plan." Sounds good, right? In reality, a shareholder rights plan is actually known as a "poison pill" that makes acquisition of a company nearly impossible. The plan protects management, not shareholders. An investor with little background of the specifics could easily be misled into voting for something destructive, simply by the name of the plan.
Nevertheless, there are a few black-and-white rules. For example, it's usually a good idea to have independent directors on the board rather than company insiders. However, even these votes aren't always clear cut. For example, what's worse: an insider with lots of experience on the board, or an independent director with very little? It's hard to say. There's always an exception to every rule.
If you want to be involved in corporate governance, one of the best resources is the ISS' 2013 US Proxy Voting Summary Guidelines, which is available here. Institutional Shareholder Services' (ISS) job is to find the best ways to vote to promote shareholder value. If you think figuring out your vote on a few dozen shares in your portfolio is difficult, imagine a mutual fund having to vote for 300 companies within a span of a few months. Because of this almost insurmountable task, major mutual funds and pension funds hire ISS to do the voting for them. Sometimes the mutual funds give their own guidelines, but other times, they simply follow the advice of ISS.
The ISS guidelines can be a little tricky, as many issues vary case by case. However, they often give good guidance on voting for or against some of the most obscure measures that might be difficult to figure out without help. Their guidelines cover just about any topic that could come up for a vote. If you're stumped on a particularly strange item, check the ISS guidelines.
My final advice is to keep up to date on company news leading up to an annual meeting. Often, when there's something truly wrong with a company's corporate governance, a shareholder activist will try to organize shareholders. These activists can help provide guidance as well.
While few retail investors participate in elections, if you have the extra time, it certainly doesn't hurt to cast your vote – especially if it takes only a moment online.
You're probably wondering about the company mentioned at the beginning of this article. I have to admit, it's been one of my favorite holdings for Money Forever, having recently raised its dividend payout by a massive 150%; and its share price is up 38% since we recommended it. It's one of the core holdings in our portfolio and you should consider it, too. Find out more about starting a 90-day risk-free trial to Money Forever and get the details on this company.