Quality Seen as Key to Future of Proxy Voting
Reducing number of votes would enhance their strategic value, says a recent report from investment research institute FCLTGlobal.
Responsible investment experts have welcomed a new recommendation to boost the quality of proxy votes by reducing the number of items included on the ballot forms.
In a recent report, investment research institute FCLTGlobal suggested that the right to propose resolutions should be restricted solely to long-term strategic shareholders. This would reduce the number of items on proxy ballots and increase their value to the business.
The suggestion was one of a number made in the report which looks to reform the proxy voting system, focusing on reducing costs and enhancing the strategic value of votes.
“There needs to be greater discipline on the number and the quality of shareholder proposals, particularly in the United States, where some seem to seek to micromanage the company,” Leon Kamhi, Head of Responsibility & EOS at investment manager Federated Hermes, who contributed to FCLTGlobal’s report, told ESG Investor. EOS is Federated Hermes’ dedicated stewardship service which provides corporate engagement and proxy voting for more than 70 institutional investor clients with just over US$2 trillion in AUM.
Anna Tilba, Professor in Strategy and Governance at Durham University, also agreed with the report’s suggestion of raising the standards of shareholder proposals, noting that “better quality proposals can ensure better quality and more meaningful engagement”.
Striking a balance
Proxy voting is a key component of ESG engagement, and it is becoming more prevalent.
Last month, US SIF Foundation data found that 68% of 265 respondents to its sustainable investing trends survey said they participated in proxy voting. During the 2024 proxy season, the PRI’s resolution database logged 800 ESG-related shareholder resolutions, director votes and management proposals by mid-July.
In its report, FCLTGlobal’s noted that proxy advisory provider Institutional Shareholder Services alone issued recommendations covering more than 643,000 ballot items worldwide in 2023, a 160% increase 2005, when 247,000 recommendations were made.
Morningstar and other research institutions have previously suggested that investors need to think more strategically before filing ESG-focused shareholder proposals and be more specific in their requests.
Limiting the number of proxy items in this way could lower the cost of voting and make the process more impactful.“Whilst we would be wary of limiting or reducing the right of shareholders to file shareholder proposals, there is a risk that the impact of these proposals could be diluted by resolutions that aren’t being filed with the aim of driving positive change or that aren’t addressing the most material issues,” said Kimberley Lewis, Head of Active Ownership at Schroders.
Lewis, who also contributed to FCLTGlobal’s report, added that shareholder proposals can be a “powerful tool for calling for corporate change and to draw attention to salient issues, especially when other forms of engagement haven’t proven fruitful”.
Shareholder rights are increasingly seen to be under threat, a concern heightened by the re-election of Donald Trump as President and his pick of Paul Atkins as head of the US Securities and Exchange Commission.
FCLTGlobal’s report also suggested reducing proxy voting to focus only on director elections, citing them as the “most important proxy vote”. But this is a suggestion that goes too far for Kamhi.
“There are probably too many shareholder proposals at the moment, but I wouldn’t go as far as saying we want to reduce the focus only on director elections,” he said. “There still needs to be an ability for shareholders to put forward proposals if they feel the company is not being run in an in an appropriate way.”
Cutting costs
According to the report, director elections accounted for more than 65% of total management proposals in the US, just over 75% in Japan, and approximately 35% in the UK last year.
Approximately 600,000 of the more than 1.5 million management issue items between 2022 and 2024 concerned the election of directors. This was by far the most for any single topic, and therefore responsible for the majority of costs and vote volume.
“The costs and especially the volume of proxy votes could potentially undermine the efficiency and effectiveness of the voting process,” said Durham’s Tilba. “Financial costs, including administrative expenses and research fees, may disproportionately affect smaller shareholders, reducing their ability to participate [and] the high volume of votes, especially during AGM season, could create time constraints that may hinder thorough analysis of issues voted upon.”
EOS at Federated Hermes provides voting recommendations for around half of its 70 institutional investor clients. EOS has a team of just over 30 involved in engagement and voted at 10,800 company meetings in 2024.
“A structural issue in the proxy voting process is that we and other investment managers only have so many resources to vote at many companies, and we probably have one of the largest teams out there,” said Kamhi.
EOS actively voted at 900 meetings in total, including 35 intensive votes, where the manager went through the AGM information and used information from proxy providers detailed alert for clients. Kamhi described this as a “quite intense” process, providing detail on arguments on voting for or against a particular resolution, involving several conversations with the company.
“Voting is an investor duty and valuable to investors. Still, there’s no silver bullet to voting well and that’s because of the industry structure,” said Kamhi. “You have limited resources to vote at so many companies. That is a structural issue which you can’t simply solve.”
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