When Is One Vote Not Equal to Another
By David Shaw

We’ve had some lively discussions among our staff on our “The State of Corporate Democracy” section in this issue. Does a single share “count” as much as two shares, or a million?  Do small activist shareholders have an equal right to the time and attention of the board and the executive team as shareholders with large stakes or institutional shareholders?

The purchase of a share of stock is already a vote — usually a vote of confidence in a company’s ability to deliver a return on investment in that share, through an increase in share price (and a regular dividend if that’s offered). If the share is in a mutual fund, it’s a vote of confidence in the fund manager’s ability to outperform other investment options. If it’s in an index fund, that’s a vote of confidence on the overall performance of a basket of stocks. In some cases, activist investors will purchase large blocks of shares as a vote of confidence in their own ability to effect changes at the company, or be paid to go away. In any event, the buying of a share of stock is itself a vote, which carried with it other voting rights and responsibilities.

There are similarities between American democracy and corporate shareholder democracy.  Shareholders elect board members — who have fiduciary responsibility to exercise a duty of care and duty of loyalty — to represent their interests. This compares with the American process of electing members of the House and the Senate, though Americans also vote for their president, while shareholders rely on the board to select and nurture the company’s leadership.

There are also key differences. There’s no electoral college in corporate democracy, weighing the interests of small states against those of larger states.  There’s no mandate for there to be equal representation regardless of population (or shareholding) such as there is with the Senate. In corporate democracy, a share is a vote, and one vote is outweighed by a million votes. If the same were true in American democracy, the Senate would look very different, and we’d have a different president right now. In national American politics, one vote is not truly equal with another. At least a disgruntled shareholder can sell his or her stake.

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But this isn’t to say that corporate democracy can’t be improved. In 2016, 91% of institutional shareholders (who own 70% of all stocks in the US) voted their shares, according to ProxyPulse, published by Broadridge Financial Solutions, Inc. and PwC. Only 28% of retail shareholders voted, a number that’s come way down since the elimination of broker discretionary voting on even uncontested director elections by the New York Stock Exchange on 2009.

How to improve that retail voting number, and enhance overall interaction between shareholders and their boards and managements? Holding a physical annual meeting, attended by a few hundred live investors (and often, a gadfly or two)? That hasn’t worked thus far for the majority of public companies.

I like the idea of a virtual annual meeting (as is suggested elsewhere in this issue), not as a way to cut off shareholder engagement, but as a way to enhance it. Norman Augustine offers his suggestions on how these meetings could best work.

(Related Story: Corprocracy in America ... RIP)

Publicly held companies should agree on a virtual meeting format that:

• allows shareholders to interact with each other before the meeting on key governance issues.

• enhances engagement with the board and management.

• improves shareholder visibility into operations and future plans.

Boards and companies should establish rules for the conduct of virtual meetings that all would follow — perhaps under the auspices of an organization like the National Association of Corporate Directors. These rules should ensure and maximize shareholder communication and engagement. Either that, or as more companies opt for virtual meetings, we can all wait for the SEC and/or Congress to step in with their own virtual meeting regulatory regime.

If these companies put half the money they spend now on a physical meeting into making the virtual experience entertaining and informative for shareholders, I think we’d see an improvement in communications between shareholders and the companies they own.  

2017 Annual Report

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