Why Vote Counting Matters

“Fair corporate suffrage is an important right that should attach to every equity security bought on a public exchange.”

– U.S. House of Representatives, Securities Exchange Act of 1934

It’s a little-known fact that corporations are allowed to count shareholder votes using a variety of different formulas. Why is this a problem? When companies count votes differently it creates variant outcomes – outcomes that are quite often detrimental to shareholder value.

Voting should be fair, consistent, and transparent – yet the state of voting in corporate America is decidedly not.

Investor Voice examined the data. We analyzed every vote cast on a shareholder-sponsored item over the past 11 years at essentially all American companies, and have published what we found.

The attached synopsis describes these findings. It includes the number of times true-majority shareholder votes were subverted by company voting practices and dismissed as having “failed,” and the ways in which these practices prevent the shareholder voice from being heard.

Read more below, or click for a: formatted PDF of the full report.
Read coverage on this report from: Corporate Secretary magazine.
Read coverage by: The Wall Street Journal.

Simple-Majority Standard for use in Corporate Proxies

Introduction

This Investor Voice fact sheet provides an overview of a simple-majority vote-counting shareholder initiative which asks companies to decide all issues by a simple majority of the shares voted for and against an item.

Companies owe an undivided loyalty to shareholders, yet there is little consistency in how proxy votes are counted. Companies often use more than one vote-counting formula within a single proxy, and this inconsistency has a disproportionate impact on shareholders, is confusing, quietly imposes supermajority thresholds, and results in majority votes being dismissed as failing.

The U.S. Securities and Exchange Commission (SEC) mandates the use of a simple-majority formula for determining resubmission eligibility of a shareholder-sponsored proposal. However, companies are chartered at the State level and so a federal mandate cannot establish a consistent voting standard for all proxy votes; hence, the initiative.

A simple-majority formula is a straightforward measure of for versus against votes. Simple-Majority:

FOR / (FOR + AGAINST)

Until recently, many companies used a variant vote-counting formula, made popular especially under Delaware law, which had a tremendously depressive effect on vote outcomes:

FOR / (FOR + AGAINST + ABSTAIN + BROKER NON-VOTES)

Fortunately, broker non-votes were disallowed by the New York Stock Exchange in 2009; however, abstentions may still be counted using a formula we refer to as Modified Delaware:

FOR / (FOR + AGAINST + ABSTAIN)

The Voting Initiative

Adding numbers to the denominator of a formula has the invariable, mathematical effect of lowering the vote tally.

This can and does create sizable disruptions in vote outcomes, and has caused a number of majority votes (counted by a simple-majority formula) to be dismissed as having failed.

To highlight and seek improved practices, Investor Voice created a simple-majority vote-counting initiative. Over the past six years 37 Proposals have been submitted to 13 companies, and to date, roughly one-third have taken steps to adopt a simple-majority standard.

Co-filers in this initiative have included Boston Common Asset Management, First Affirmative Financial Network, Miller-Howard Investments, Newground Social Investment, and Walden Asset Management. Details on the shareholder Proposal’s evolution may be found in the appendix.

In an important development, CalPERS is also engaged. It commissioned GMI Ratings to write Vote Calculation Methodologies, which examined the largest 1,000 companies in the S&P 500 and Russell 1000, and found that 48% employ the simple-majority vote-counting standard requested by this initiative.

Research & Methodology

Investor Voice partnered with Cook ESG Research and the Sustainable Investments Institute to explore the question: “what impact does counting abstentions have on vote outcomes?” A dataset was created which includes every vote cast on a shareholder-sponsored proposal for the period 2004-2014. This comprises 6,379 discrete ballots and all companies listed in the S&P 100, S&P 500, and Russell 3000 (as well as other companies not on an index).

Calculations utilized the raw vote numbers provided by companies to the SEC, and vote tallies were generated using both the Simple-Majority and the Modified Delaware formulas noted above.

In so doing it was possible to calculate the size of the ‘abstention gap’ – defined as the degree to which votes are reduced when abstentions are counted using the Modified Delaware formula – and also to examine instances where an individual vote would earn a majority under Simple-Majority, but would appear to fail under Modified Delaware.

For the purposes of this report, a 50% or higher vote that derives from a Simple-Majority formula will be referred to as a ‘true-majority’ outcome.

Study Results & Conclusions

Finding #1: From 2004-2014, 63 shareholder-sponsored proposal votes earned a true-majority, but these votes were dismissed as failing under Modified Delaware.

During the same period, 73 shareholder proposals overall had vote tallies reduced by more than 10%, and 357 were lowered by more than 5% under Modified Delaware. The largest single abstention gap was a vote diminished by 49.0% under Modified Delaware.

The number of instances and the sizes of voting discrepancy uncovered serve to highlight the seriousness and extent of this under-recognized governance issue.

Finding #2: Of the 63 true-majority votes identified by this study, 39.7% had an abstention gap of 2.0% or less.

There is no threshold at which abstentions did not matter – indicating that whether large or small, abstention gaps erode shareholder democracy and can unseat true-majority votes.

Confusion & Intent

Voter intent: Because it is not possible to discern an abstaining voter’s intent, a process which unilaterally counts all abstain votes in a single way inevitably acts to disenfranchise certain voters.

Such a system exhibits a logical inconsistency that is not aligned with shareholder best-interest.

Unnecessarily Confusing: Counting abstentions creates two vote outcomes for every shareholder-sponsored item, but only a single outcome for management-sponsored ones.

The two outcomes are: (a) the company’s count, and (b) the SEC-mandated simple-majority result (for determining resubmission eligibility).

Since shareholder-sponsored proposals are nearly all ‘precatory’ and non-binding – i.e., they are merely advisory to management – there is no practical end served by allowing two vote outcomes to stand. A company’s count is not determinative while the SEC’s result is; therefore, a simple-majority standard reduces confusion and leads to a more accurate and informative outcome.

Inadvertent supermajority: Because abstentions vary so widely company-to-company and item-to-item, counting them essentially creates a type of ‘backdoor’ supermajority requirement with moving targets on each-and-every vote – never clear what is truly necessary to pass. On one vote abstentions might create a 2% higher threshold, while another item on the same proxy could have a 30% higher threshold.

The Simple-Majority calculus creates a clear, consistent standard across issues, companies, and time.

Abstention maneuvers: The Manhattan Institute’s Proxy Monitor (PM) is a conservative organ that actively criticizes shareholder resolution efforts. Toward its own ends, the PM consistently adds abstentions into vote tallies, which creates a false impression of low levels of support by investors for ESG topics of concern.

The Harvard Law School Forum on Corporate Governance and Financial Regulation published an examination of these practices, and concluded: “In the last four years, the Proxy Monitor results… have consistently understated the voting results, sometimes significantly.”

PM’s deficient reports are widely used by the US Chamber of Commerce, widely quoted by SEC Commissioner Gallagher, and get published without scrutiny in WSJ articles and editorials.

A Simple-Majority standard would ensure that all votes are handled and reported in an appropriately consistent, transparent, and above-board manner.

Transparent, Simple and Familiar

Simple-Majority voting is aligned with investor expectations because it resembles something they are familiar with: Democratic electoral politics.

Proxy reporting: Major services – including ISS & Glass Lewis – harmonize reports to a consistent, simple-majority format, which allows proxy votes to be comparable company-to-company and industry-by-industry.

States’ choice: Several states, including New York State (one of the nation’s most important business states and home to the NYSE), mandate simple-majority voting as a default standard.

Delaware, home to the largest number of S&P 500 corporations, permits simple-majority voting but has not yet mandated it.

Transparent: Investors report being unaware that under Modified Delaware their abstentions “have the same effect as a vote against.” They may be unclear how votes get counted because voting policies are difficult to find: proxies are long, don’t follow a consistent format, and the language can be highly technical – sometimes hinging on the legal meaning of a single word.

A Simple-Majority approach clears the air of confusion over how votes are counted.

Votes for: Shareholders have already voted on a type of simple-majority proposal 89 times from 2012-2015, and in each-and-every instance they affirmed it with votes from 62.3% up to 100%.

These recent proposals sought a simple-majority standard in lieu of supermajority requirements, and the strength of the vote outcomes demonstrate that shareholders are familiar with, comfortable with, and overwhelmingly prefer a simple-majority voting standard.

In Summary

Simple-Majority:

Is in active use by 48% of American companies
Is mandated by several States
Is employed by proxy voting services
Has been adopted by a third of companies approached by this initiative; and where voted on has received support ranging from 8.1% up to 81.9%
Prevents manipulation by outside parties
Fairly, accurately, and consistently reports vote outcomes

Therefore, we seek to harmonize voting practices across all items at all companies through adoption of a uniform, Simple-Majority voting standard.

We invite you to join this initiative in support of shareholder democracy by voting for simple-majority resolutions, filing shareholder proposals, and encouraging your company to adopt a simple-majority standard as a corporate governance best-practice.

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APPENDIX

Filing History and Evolution of the Proposal

Current Resolve clause:

Shareholders request the Board of Directors to amend the Company’s governing documents to provide that all matters presented to shareholders, other than the election of directors, shall be decided by a simple majority of the shares voted for and against an item. This policy shall apply to all such matters unless shareholders have approved higher thresholds, or applicable laws or stock exchange regulations dictate otherwise.

Proposal history:

2009-2010 Simple-majority shareholder Proposal submitted for the first time.

One Proposal was voted on, and received a 17.8% for vote.
- 2010-2011 One company accepted and enacted a simple-majority standard.
- Plum Creek Timber enacted Proposal to adopt a simple-majority standard.
  2011-2012 One company accepted and enacted a simple-majority standard.
Cardinal Health enacted Proposal to adopt a simple-majority standard.
2012-2013 Companies initiated SEC no-action challenges on basis of potential conflict with State law.
A number of strategic withdrawals were made.
Proposal was amended to ensure it fully aligns with State law.
Votes ranged from 8.7% up to 13.3%

2013-2014 One company accepted and enacted a simple-majority standard.

No SEC no-action challenges on basis of potential conflict with State law.

Companies initiated SEC no-action challenges on basis of potential confusion regarding treatment of Board election vis-à-vis other items.

Companies also challenged the format of Letters of Appointment and Letters of Intent.

J.M. Smucker Company enacted Proposal to adopt a simple-majority standard.
No challenge to a Letter of Appointment or Letter of Intent was upheld by the SEC.
One challenge regarding potential confusion was upheld – despite the fact that the specific language challenged had been quoted directly from JPMorgan Chase’s own proxy materials (where it had appeared for each of the six preceding years).
Proposal was amended to remove reference to Board of Directors election.
Votes ranged from 8.1% up to 81.9%

2014-2015 One company accepted and enacted a simple-majority standard.

No SEC no-action challenges were made on any grounds.

ConAgra Foods enacted Proposal to adopt a simple-majority standard.
McDonald’s Corporation agreed to a proxy notice and substantive consideration.
Proposal co-filed by Boston Common Asset Management, First Affirmative Financial Network, Miller-Howard Investments, Newground Social Investment, and Walden Asset Management.
Proposal expected to be voted on at 8 companies.

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