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Sustainable Investing

Why Should I Care About Proxy Votes?

If you’re a shareholder, proxy voting is your opportunity to have your say in company decisions.

Blue and purple illustrative collage of a vote being cast in a ballot box

Editor’s Note: This is an updated version of an article originally published in November 2021.

Springtime is proxy time.

If you own a stock, you’re considered a part business owner (aka shareholder) of that company. This entitles you to a proxy vote, which is your opportunity to have your say in how the company is governed. You can cast your vote on many issues, including:

How Does Proxy Voting Work?

Publicly traded companies report to their shareholders through annual shareholder meetings and other communications. Companies send proxy statements, detailing the resolutions that shareholders will be voting on during the meeting.

These days, very few investors attend shareholder meetings in person, which means that most votes are cast as “proxy votes” online, by phone, or by mail. Fund companies vote on behalf of fund investors.

What’s on a Proxy Ballot?

A typical proxy ballot contains a list of directors to be voted on, an item for approving the auditor selected by the board for the fiscal year ahead, and an item requesting shareholders to vote on the top five executive officers’ pay for the previous fiscal year. The proxy materials accompanying the ballot give information on each of these items.

About half of U.S. company ballots contain additional items called shareholder resolutions. As an investor who holds a minimum level of stock in a company directly, you can file shareholder resolutions and vote your stock. These proposals filed by investors can cover a range of environmental, social, and governance issues, such as lobbying disclosure, climate change, diversity, and data privacy.

How Does Proxy Voting Make a Difference?

There are binding resolutions that can concretely reshape the course of a company. Corporate board elections are a great example; board composition can make a difference between one packed with cronies who will line executives’ pockets versus one with a long-term focus on shareholder returns and, in the case of ESG—or environmental, social and governance—practices, the bigger-picture impact of a company. The organizing efforts for proxy voting have also grown stronger in recent years.

Even the nonbinding proposals such as the advisory vote on compensation practices can help influence and change the incentives of company executives. The range of items up for vote on a proxy ballot affords shareholders an opportunity to weigh in on the governance and direction of a company, and this has real effects at the company level as well as across the whole economy. Managing ESG risks can provide immense long-term benefits for companies and, in turn, for investors.

Do Fund Companies Play a Role in the Proxy-Voting Process?

Index investing’s growing market share compounds the importance of the proxy-voting process. When actively managed funds dominated, they could lobby management or sell the stock if they didn’t like a company’s direction. Index funds don’t have a choice in which stocks to own—so while the index providers can lobby management for better governance, ultimately the only lever they have is through their votes.

Much like the items on a proxy ballot, the landscape of proxy voting changes.

For example, the Big Three asset managers (BlackRock, State Street, and Vanguard) took care of all proxy-voting decisions for index fund investors. Now, select fund investors have the opportunity to vote according to their values in a process called proxy-voting choice.

“It allows investors to select an alternative proxy-voting policy that prioritizes climate change or other sustainability or governance objectives that differ from the Big Three’s house policies,” writes Lindsey Stewart, director of investment stewardship research for Morningstar.

Why Proxy Voting Matters

Proxy voting and investment stewardship are key to protecting long-term portfolio value. It is essential for investors to remain vigilant in protecting their right to submit shareholder resolutions pressing for more sustainable governance practices.

Evaluate the shareholder proposals and the concerns they raise about the sustainability of a business’ operations. Track how the funds in your portfolio vote across different ESG issues. You have a right and a responsibility to have your say. In so doing, you contribute to a more resilient financial system for the future. Use your votes—and your voice.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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