Voting Integrity

Posted by Stephen Davis, Millstein Center for Corporate Governance & Performance, Yale School of Management, on Thursday March 5, 2009 at 8:43 am
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Editor’s Note: This post is by Stephen Davis of the Yale School of Management.

The Millstein Center for Corporate Governance and Performance at the Yale School of Management has recently released a new policy briefing entitled “Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry.”

Accountability of corporate boards to shareowners rests in large part on the integrity of the system by which investors vote their proxy ballots. Shareowners rely on the vote to affect the governance of a company; corporate directors see the vote as a barometer of investor confidence in board stewardship. Outcomes determine the fate of director tenure, mergers, acquisitions, capital raising, remuneration plans and other critical decisions with sometimes profound consequences for stakeholders and the marketplace.

However, this briefing finds that the proxy voting system in the US and other markets is chronically subject to criticism that it is short on integrity sufficient to ensure trust. Parties involved are institutional investors, agents such as proxy advisory services, and intermediaries charged with transmitting ballots. Threats include conflicts of interest, opacity, technical faults in the chain by which ballots are transmitted, and a shortage of resources devoted to informed decision-making.

Remedies proposed in this briefing include:

• Governance firms should endorse and comply with a first industry-wide code of professional ethics, including a general ban on a vote advisor performing consulting work for any company on which it provides voting recommendations or ratings.

• Institutional investors should endorse and follow guidance on their own governance produced by the International Corporate Governance Network.

• Institutional investors should report to clients or beneficiaries at least annually on their voting policies and voting records. Further, such institutions should regularly review voting policies to ensure they are fit for purpose; identify, manage and disclose real or potential conflicts of interest on a regular basis; and determine the level and quality of resources necessary and appropriate to deliver vote recommendations and decisions that are in line with their voting policies.

• The US Securities and Exchange Commission should empanel a high-level independent review aimed at modernizing the US proxy voting system. Regulators should work with counterpart bodies in other markets to supervise the seamless integration of national systems to enable accurate and efficient cross-border voting.

The full briefing can be found here.

  1. Voting integrity will also be improved if more investors start using developed by Harvard graduate student Andy Eggers. Employers and unions could encourage their employees and members who own stock or mutual funds to start using ProxyDemocracy to help them make their own decisions regarding proxy votes and which mutual funds to invest in. As more users turn to the site where fund voting can be easily compared, more discussion will be generated regarding the logic (or lack of it) behind the votes.

    Comment by James McRitchie — March 5, 2009 @ 10:22 pm


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