The outsized impact of counting abstentions on shareholder proposals
As we enter the thick of proxy season, it’s worth revisiting the structural bias against shareholder-sponsored proposals in most proxies. I’m talking about the counting of abstentions when determining vote percentage outcomes for such proposals.
Investor Voice, partnering with Cook ESG Research and the Sustainable Investments Institute, has carried out a study of the impact that counting abstentions – referred to as the modified Delaware formula, and practiced by 52 percent of the companies in the S&P 500 and Russell 1000 Indexes – has on vote outcomes. The dataset it uses incorporates every vote cast on a shareholder proposal between 2004 and 2014, totaling 6,379 proxies. By comparing vote tallies generated by the simple-majority formula with the modified Delaware formula, researchers calculated the size of the abstention gap, which measures the extent to which vote percentages are reduced when abstentions are counted.
The analysis finds that during that 11-year period 63 shareholder-sponsored proposals received a true majority, or a 50 percent or higher vote, using the simple-majority formula, but that these votes were deemed as failing under the modified Delaware formula. Of the 63 true-majority votes, more than 60 percent had an abstention gap exceeding 2 percent. In the same period, vote tallies on 73 shareholder proposals were reduced by more than 10 percent and 357 were reduced by more than 5 percent.
Additional findings not included in the Investor Voice report show that true-majority votes for shareholder proposals were dismissed as failing 7.6 times more often than for management proposals: 1 percent versus 0.13 percent. And the average ‘abstention gap’ on shareholder-sponsored items was 69.7 percent higher than on management-sponsored items: 1.29 percent versus 0.76 percent.
These votes become public at companies’ annual shareholder meetings. Bruce Herbert, chief executive of Investor Voice, says he’s heard only of companies reporting their own counts at these meetings, not the simple-majority count mandated by the SEC to determine whether a proposal is eligible for resubmission in the following year’s proxy.
‘That dismisses the real interest in a topic,’ he says. ‘It provides a bad flow of information to shareholders and the press. The press gets misled into thinking shareholders didn’t receive a majority vote, that [the vote] failed, because that’s almost universally the language you hear.’ Nobody takes a closer look two days later to realize that certain votes didn’t fail when calculated in the way proxy reporting services do it, and articles in the press certainly aren’t updated to reflect closer examination, he adds.
Timothy Smith, director of ESG shareholder engagement at Walden Asset Management in Boston, which has co-filed with Investor Voice resolutions on vote-counting at various companies, says that far from being a debate about numbers, this is part of a larger effort by the US Chamber of Commerce and the Manhattan Institute to paint all proponents of shareholder proposals as special interest groups such as trade unions and downplay broader interest in these proposals.
‘From our point of view, that’s just an insulting attack when you’re doing this to enhance shareholder value,’ Smith says.
Given that Corporate Secretary’s annual Corporate Governance Awards include two awards for best proxy statement (according to market cap), I asked our judges whether they had any thoughts on companies counting abstentions in their vote tallies. One replied that ‘companies do not pick voting standards based on whether or not abstentions are counted. Also, the standards are applied fairly across all of the ballot items if abstentions count as against votes, that may be less favorable for shareholder proposals, but it is equally as unfavorable for say-on-pay votes and equity plans.’
Herbert disagrees, saying you only have to look at management-sponsored proposal #1 – board elections – to see that isn’t true. ‘I’ve never seen a company count abstentions on that: it creates the strongest impression of support for management slates of directors,’ he says. The fact that shareholder proposals are allotted only 500 words or fewer in proxies, and management is free to exclude the name of the shareholder, while there’s no limit placed on the length of management’s statement of opposition to a shareholder proposal, turns the proxy into a kind of ‘bully pulpit’ for management, which can be fairly sure its proposals will pass, he adds.
Because you can’t know what voter intent is, it’s unfair to cast every abstention as if it were following management’s recommendation against a shareholder proposal, Herbert says. ‘I have yet to hear any rationale for why that is good governance.’
To the assertion by companies that because the vote isn’t binding, counting abstentions doesn’t matter, Herbert counters that companies’ efforts to continue doing it that way suggest it must matter to them. ‘Challenges at the SEC, trying to strike these items [from] the proxy, writing statements in opposition, refusing to consider any changes to their policies’ – these all suggest companies are doing all they can to limit the impact of shareholders proposals.