An Introduction to Proxy Voting

Shareholders have the right to vote on official company business either directly, by attending the company's annual general meeting, or indirectly, by submitting a proxy ballot. Since the majority of shareholders do not attend the annual meeting (corporations may have tens of thousands of shareholders), most voting takes place by proxy.

Since the so-called "Avon Letter" of 1988 (an interpretive letter from the Department of Labor to the chairman of the retirement board of Avon Products, Inc.), proxy voting has been recognized as a responsibility for those plan fiduciaries that are subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). In 1994 (and again in 2008), the Department of Labor issued clear guidelines that stated, "The fiduciary act of managing plan assets that are shares of corporate stock includes the management of voting rights appurtenant to those shares of stock."

The Department of Labor further specifies that when voting proxies, ERISA-bound fiduciaries "shall consider only those factors that relate to the economic value of the plan's investment and shall not subordinate the interests of the participants and beneficiaries in their retirement income to unrelated objectives." Determining what is an "unrelated objective" is a tricky matter, but most institutional investors—whether subject to ERISA or not—understand that proxy voting is an important tool of active ownership and can promote shareholder value. Through purposeful proxy voting, shareholders provide feedback to company management on corporate governance policies. Increasingly, proxy voting activities also incorporate the examination of environmental and social practices. More and more investors agree that these practices may have an impact on the attainment of long-term shareholder value and are, therefore, important elements of sustainable business practices.

It is good practice for institutional investors to publish their proxy voting guidelines and many also publish their proxy voting results (how they voted on specific items.)

Corporate Governance Best Practices

Investors may differ on how to vote specific proxy ballot issues, but certain governance principles have been accepted by a majority of sustainable investors as representing "best practices." Most investors, for example, agree that sound corporate governance is the best foundation for a sustainable—and profitable—company. Some principles contributing to sound corporate governance include:

• a primarily independent board of directors, elected annually, with an independent chairperson or lead director
• diverse (gender, racial and ethnic) representation on the board
• independent audit, nominating and compensation committees
• election of directors by confidential, majority vote with equal voting rights for all shareholders
• auditor independence
• executive compensation programs that are linked to company performance

Many sustainable investors also believe that boards should:

• disclose their political and lobbying contributions
• allow shareholders the ability to nominate candidates for the board of directors (usually called proxy access)
• release proxy vote totals in a timely fashion
• allow shareholders the opportunity to call a special meeting

These principles reflect the prevailing wisdom that boards of directors have an obligation to provide careful oversight of company operations, to manage risk effectively and to keep an eye on long-term sustainability. They echo rules adopted by the Securities and Exchange Commission (SEC) requiring company proxy statements to include information on:

• compensation policies and their relationship to risk management (for example, whether compensation policies are encouraging excessive risk-taking by employees)
• the background and qualifications of director nominees
• any legal actions involving company executives, directors and director nominees
• the role diversity plays in the consideration of director nominees
• board leadership structure (including whether the chairperson of the board and the chief executive officer are two separate individuals, and if not, why not)
• stock awards to company executives (the value of options must be reported as of the date they are awarded)
• any conflicts of interest involving compensation consultants

The corporate governance policies of the Council of Institutional Investors (CII) provide an effective benchmark for sound governance practices. CII is one of the Wespath Benefits and Investments' (Wespath) strategic partners and is an association of large pension funds, endowments and foundations dedicated to effective corporate governance. Their policies are available here.

Wespath's proxy voting guidelines (available here) align with these widely-held "best practices" and are updated annually.

Shareholder Resolutions

Proxy ballots provide shareholders many opportunities to influence company policies and practices. One such opportunity is through a shareholder resolution. Shareholder resolutions have been a feature of proxy ballots – particularly in the U.S. - since the 1940s. They may be submitted by individual shareholders and they usually ask that the company take a specific action such as preparing a report on an issue that affects some aspect of company operations. These issues may be related to corporate governance, but often focus on environmental and social issues.

To date, many investors have supported shareholder resolutions asking companies to prepare sustainability reports. These reports give companies an opportunity to examine topics such as energy efficiency, climate change risk, greenhouse gas emissions, water usage and other environmental issues, and to disclose to shareholders the actions required to mitigate risk.

Likewise, sustainable investors have supported shareholder resolutions that call upon companies to endorse or operate in conformity with widely accepted international standards of conduct such as the:

• United Nation's Universal Declaration of Human Rights
• United Nation's Guiding Principles on Business and Human Rights
• United Nation's Global Compact
• International Labor Organization's Declaration on Fundamental Principles and Rights at Work

Investors file shareholder resolutions for a variety of reasons. One of the most common is to encourage company management to engage directly with shareholders, including through a face-to-face meeting. Many resolutions are withdrawn when such a meeting is arranged.

Shareholder resolutions that come to a vote at a company's annual general meeting meet with varying success. Many receive little support from shareholders whereas others may receive significant—even majority—support. Regardless of vote totals, resolutions are advisory only; companies may ignore them even when supported by a majority of shareholders. When this happens, shareholders may choose to withhold votes in subsequent years from directors who refused to respond to shareholder wishes.

Voting Proxies

For institutional investors holding hundreds—if not thousands—of companies in their portfolios, proxy voting can be a laborious process. The funds offered through Wespath and its subsidiaries hold shares in approximately 5,000 companies around the world. Wespath retains the services of an external proxy voting firm to assist in the voting process. The proxy voting firm provides a computerized voting platform whereby votes are cast based on our proxy voting guidelines. For proxy issues not covered by specific guidelines, Wespath reviews the recommendations of the proxy voting service before casting a vote.

Proxy voting occurs throughout the year because annual meetings may be scheduled at any time. In the U.S., however, most annual meetings take place between the months of March and June. These months are often referred to as "proxy season."

Conclusion

In the absence of more direct engagement, proxy voting represents the shareholder's most important tool to influence a company's governance and business practices. Wespath strives to vote all proxies in ways that protect our investors and honor the values of The United Methodist Church.