Proxy Season

Investing
By
Patrick A. Labbe, CFA

It’s that special time of year again!  No, I’m not referring to the start of baseball season.  I’m talking about proxy season—that magical time of year when public companies request shareholder votes on a number of topics.  It’s not as exciting as an afternoon at the ballpark, but proxies do play an important role in the investment process, and I want to describe our views on some common proxy issues.

One thing you should know is that there is an entire industry devoted to advising investors regarding proxy votes.  We’re not sure how much value is created by “proxy firms,” but we have no interest in outsourcing any part of the investment management process, including proxy voting.  We prefer to rely on our own careful analysis.  Exercising our best judgment sometimes means voting “no” on a number of issues, most commonly on executive compensation.  Running a large and complex business is extremely difficult, and excellent managers deserve excellent pay.  While we do find some compensation plans excessive, our main objection is often to the use of stock options, rather than cash, as compensation.  Proponents claim that options are necessary to align management interests with shareholder interests.  But because options offer all of the upside in share prices without corresponding losses should prices decline, it’s obvious that management is not in the same boat as shareholders.  Should a CEO fail miserably, causing the stock price to fall, the CEO may well be disappointed to find his/her options adding nothing to salary.  The firm’s shareholders, however, may experience a more meaningful loss of capital, which is a very different thing.  We prefer that executives be compensated in cash and to use some of that cash to buy shares in the open market, like any other shareholder. 

Another area we frequently cast “no” votes is in response to nominees for a company’s Board of Directors.  We sometimes see nominees who own few—if any—shares of stock in the company they’re nominated to oversee.   It is hard to imagine directors looking out for shareholders when they aren’t shareholders themselves.  In support of establishing a Board most likely to act in shareholder interests, we favor minimum ownership requirements for Board members and frequently vote against nominees who lack a meaningful investment in the company.  We also review in detail other factors relating to nominees, such as meeting attendance and potential conflicts of interest.

We do support proposals we believe likely to make the Board more accountable to shareholders.  For example, we generally prefer an independent Chairman to lead the Board rather than a member of the company’s own management team.  Also, we support cumulative voting, which tends to enhance shareholders’ ability to be represented on the Board.

Proxies contain other ballot issues, of course, and we review each one on a case-by-case basis.  When you elect to have us vote proxies for you, know that we consistently vote in favor of appropriate compensation, increased financial transparency, and in support of policies we judge to be beneficial to long-term shareholders.