Proxy voting guidelines
Anyone with a 401k or other investments owns company shares and is, therefore, a shareholder. But most of them will never attend a shareholder meeting. Proxy voting guidelines are the principles and rules that ensure those people and institutions still have a voice.
In a shareholder or corporation’s absence, an individual or firm casts a proxy vote on their behalf. Because proxy voting is the single most important avenue by which publicly traded companies report to shareholders, following rigorous guidelines is essential. Here, we’ll explain what they are, including:
- What proxy voting guidelines are
- Key components of proxy voting guidelines
- The different types of proxy votes, including plurality votes and majority votes
- Updated proxy voting guidelines from the SEC
- Tools to help you prepare for proxy season
What are proxy voting guidelines?
Proxy voting guidelines are a set of rules that govern how shareholder proxy votes will be cast. Most investors vote by proxy or select someone to vote in their place. It's also common for investors to designate a company manager to vote. However, whoever that agent is must act in the shareholders’ best interest. Ensuring they do is why guidelines exist.
Corporations should have transparent protocols for facilitating proxy voting that furthers shareholder engagement, including:
- What shareholders vote on: Shareholders can be asked to vote on any number of things, including electing officers, approving mergers and acquisitions, approving stock compensation plans, approving the auditor report, approving resolutions, and anything else the company deems relevant.
- How shareholders vote: Shareholders can cast their proxy votes by mail, phone or the internet as long as they do it before the cutoff time, usually 24 hours before the start of the shareholder meeting. Typically, shareholders vote by responding “for,” “against,” “abstain,” or “not voted.” Once they’ve voted, they can change their votes as long as they do it before the deadline.
- Fiduciary duties: As stated, the proxy has a fiduciary duty, meaning they must put the shareholders’ interests first. Guidelines should be structured to hold proxies accountable to this principle.
- Disclosures: Corporations should disclose to shareholders how proxy votes are cast. Integrating that process into guidelines upholds this mandate.
Who creates proxy voting guidelines?
Many different entities oversee proxy voting, contributing to its complex nature. While institutional investors are often the proxy voters and, therefore, develop guidelines of their own, they’re just one of many cooks in the proxy voting kitchen.
- Proxy advisory firms like Glass Lewis specialize in proxy voting recommendations. Institutional investors and corporations can adopt or adapt firms’ advice to craft their own guidelines.
- Board members: The board of directors, particularly the governance committee, should establish guidelines for the corporation. These will outline how the board engages with shareholders and proxies, including filing proxy statements; they’re also essential if the corporation itself holds shares in another entity.
- Regulatory bodies: Regulators and policymakers, like the Securities and Exchange Commission (SEC), may introduce policies that all proxy voting guidelines must follow. This creates an enforceable standard for issues like governance and shareholder rights.
- Corporate secretaries (CoSec): The CoSec manages the logistics of proxy voting and is, therefore, responsible for maintaining compliant processes and protocols. It’s up to the CoSec to compliantly notify, communicate with and facilitate the votes of shareholders and their proxies.
- Environmental, social and governance (ESG) analysts: As ESG sweeps the boardroom, analysts have an increasingly prominent role in interpreting and applying proxy voting guidelines to ESG. They may assess how ESG influences company policies and collaborate with investors to identify ESG priorities.
Key components of proxy voting guidelines
Proxy voting guidelines spell out how proxies should vote; guidelines that are insubstantial or lack key components will cause more confusion than clarity. While priorities vary between shareholders and institutional investors, most guidelines will offer a point of view on the most urgent issues likely to arise at the annual meeting.
These often include:
1. The board of directors
Shareholders make critical decisions on board composition, independence and diversity, including appointing and replacing board members. Proxy voting guidelines should have a clear perspective on which board decisions would create greater shareholder value. The BlackRock proxy voting guidelines, for example, state, “It is our view that a majority of the directors on the board should be independent to ensure objectivity in the decision-making of the board and its ability to oversee management,” making it clear they will vote to advance that view.
2. Executive compensation
CEO pay has become a hot-button issue; shareholders increasingly believe CEOs and other executives are overpaid. As such, guidelines should instruct proxies on voting on crucial compensation structures. This includes aligning compensation with company performance, “say on pay” provisions that give shareholders a voice on bonuses, stock options and perks, and clawback provisions that recapture pay in the event of financial restatements or misconduct.
3. Shareholder rights
Shareholders have certain rights in the boardroom, and comprehensive guidelines hold proxies accountable for safeguarding them. Proxy voting guidelines include explicit language on voting rights, but they also allow institutional investors to introduce proposals to enhance or protect shareholder rights or advance shareholder proposals. For example, the ISS proxy voting guidelines for the U.S. include stipulations like voting against proposals allowing the board to amend bylaws without shareholder approval.
4. ESG issues
As of 2024, more than half of institutional investors said they plan to increase their allocations to sustainable investments over the next year. More than 70% of those investors said they believe strong ESG practices will create higher returns. Many shareholders share this sentiment, so proxy voting guidelines increasingly take a stand on ESG. The ISS proxy voting guidelines include a dedicated set of ESG recommendations, including voting for additional disclosures of climate-related costs and risks.
5. Audit matters
Guidelines are also a tool that advances accountability in financial reporting. Institutional investors will take a stance on shareholders’ behalf about how to vote regarding appointing external auditors, approving audit and non-audit fees for external auditors and the composition of the audit committee, among other matters.
6. Mergers and acquisitions
Many corporations pursue mergers and acquisitions (M&A) as a path to growth, but those decisions are subject to shareholder approval. Ahead of the annual meeting, institutional investors and proxies will formulate guidelines on whether to approve or reject M&A. Depending on the information surrounding the vote, these votes may also be on a case-by-case basis and require shareholders to trust the proxy to act in their best interest.
7. Crisis response
Many crises are, by definition, unforeseeable. However, shareholders must still determine how much power and independence boards will have in responding to them. This includes proactive guidelines like voting for policies that strengthen the risk management framework and more instructive policies like whether the board must consider the long-term impact of their decisions — such as sustainability — during a crisis.
Plurality vote vs. majority vote
Proxy voting guidelines inform shareholders how proxies will vote on key issues. However, the mechanics of proxy voting can also heavily influence the outcome of the annual meeting. There are several ways to vote, but plurality and majority votes are the two most common, each with distinct implications.
Plurality vote
A plurality vote refers to a vote where the winner only needs more votes than a competitor. This means that if an individual runs unopposed, he or she only needs one vote to secure a win. Shareholders can also withhold their vote if they’re opposed to a candidate, but doing so may not sway the outcome; a candidate can still win a plurality vote with very few votes because they only need more than any other candidate. However, shareholders can use withholding to signal dissatisfaction and influence a board’s choice of candidates.
While a relatively simple voting process, plurality lacks accountability. A director can be elected when few shareholders support them, undermining their influence. The lack of a majority requirement also makes it easier for incumbent board members to keep their seats regardless of shareholder sentiment.
A plurality vote is most common when multiple people run for a single board seat to streamline the voting process. Plurality may also make sense if a candidate runs unopposed, if the vote is highly contested and no candidate is likely to win a majority or when a board needs quick and decisive votes to move through a long annual meeting agenda.
Plurality voting with runoff
Adding a runoff to a plurality vote can counteract the lack of accountability associated with this vote type. In this scenario, shareholders consider all candidates. If no candidates receive a majority vote (more than 50%), the top two candidates will proceed to a runoff election. Whichever candidate receives the majority of shareholder votes in the runoff wins.
Majority vote
A majority vote simply means that the winner gets the majority of the votes or more than 50%. This is generally considered a more democratic approach than plurality voting and is more reflective of shareholder sentiment.
In a majority vote, shareholders who abstain from or withhold votes have greater influence; abstaining can lower the votes needed for the majority, making it easier for a candidate to win. Likewise, withholding votes can signal shareholder dissent and influence the candidate’s boards put forward.
Majority voting is often used when shareholder accountability is a top priority; this vote ensures candidates have broad shareholder support. High-stakes or controversial decisions — like appointing a CEO — decisions about the company’s future that require consensus or shareholder proposals or resolutions often call for a majority vote.
Other voting methods
- Cumulative vote: Sometimes called proportional voting or block voting,this voting method is typically reserved for electing boards of directors. Each shareholder receives one vote per share times the number of open director positions. They can then allocate those votes across directors and even use all of them to support a single candidate.
- Single transferrable vote (STV): This is a preferential voting method. A shareholder gets one vote but will rank the candidates in order of preference. If their first-choice candidate reaches quota — the number of votes they need to win — before their vote is counted, they will be reallocated to their next-choice candidate. This continues until all votes are counted.
SEC proxy voting guidelines
The SEC proxy voting guidelines reach back to 2003 and have undergone several iterations since then. From the SEC roundtable of proxy voting in November 2018 to the much more stringent amendments in 2022, the changes were driven by widespread concerns about the transparency, accountability and effectiveness of proxy voting processes.
Over the years, SEC guidance and amendments have focused on:
- Fiduciary duty: Investment advisors must act in the best interest of shareholders, and the SEC has worked to ensure that advisors make decisions that align with shareholders’ financial goals.
- Proxy voting policies and procedures: The SEC governs the proxy voting guidelines other entities develop. This includes dictating that institutional investors must adopt and implement written proxy voting protocols and disclose those protocols to investors, specifically in Form ADV Part 2A.
- Conflicts of interest: An institutional investor with conflicting interests with those of its clients may struggle to fulfill its fiduciary duty. The SEC requires that institutional investors disclose these conflicts and have processes to manage them so that proxies can still vote impartially.
- Recordkeeping: Institutional investors must keep thorough records of proxy voting activities and store those records for at least five years. This includes recording votes cast, the rationale behind them and any related communication.
- Reporting: Firms must then provide their clients with the records they take, demonstrating how proxies voted. Information should be provided annually or made available upon request.
Amendments to SEC guidelines from 2020 to 2022
Unsatisfied with how reputable the proxy voting process really was, the SEC adopted rigorous new guidelines that placed proxy advisory firms and institutional investors under pressure. The 2020 guidance:
- Made proxy voting advice a “solicitation,” which prohibits proxy advisory firms from using false or misleading statements under Exchange Act Rule 14a-9.
- Increased oversight on proxy firms, mandating that they must allow companies to review and respond to voting recommendations before they’re finalized.
- Doubled down on disclosures, so proxy advisory firms had to report on conflicts of interest that could introduce biases.
- Emphasized due diligence on the part of institutional investors when relying on the recommendations of proxy advisory firms.
- Encouraged tailored voting policies suited to shareholders’ specific needs rather than implementing proxy advisory firms’ recommendations directly.
- Reinforced documentation and reporting to ensure thorough recordkeeping of all proxy activities and enforce more detailed reporting for shareholders.
These amendments sent a shockwave through proxy advisory firms and institutional investors but left room for improvement. Investors reported to the SEC “strong concerns about the rule’s impact on their ability to receive independent proxy voting advice in a timely manner.” The SEC revisited these policies in 2022, rolling back select requirements and adding others to refresh its expectations regarding proxy voting. The updated guidance:
- Maintained the definition of proxy voting advice as “solicitation” to prevent proxy advisory firms from misleading investors.
- Relaxed what constitutes “solicitation” by deleting Note (e) to Rule 14a-9, which counted failure to disclose material information like methodology or conflicts of interest as solicitation.
- Eliminated advance notice so proxy firms no longer needed to furnish their recommendations to companies before finalizing them. This was in response to concerns that advance notice was burdensome and could delay the proxy voting process.
- Reduced conflict of interest reporting to only mandate disclosures material to the voting recommendations at hand.
- Reaffirmed fiduciary duties by extrapolating on its guidance to recommend how institutional investors can carefully consider their shareholders’ needs.
- Introduced flexibility so institutional investors could be more responsive when clients express specific preferences or provide instructions on voting.
- Maintained the focus on tailored practices to proxy voting to ensure advisors adapt to the needs of their clients while relaxing some of the more stringent requirements they introduced in 2020.
| Key SEC proxy voting guidelines | 2020 guidance | 2022 guidance |
|---|---|---|
| Proxy voting advice | Considered a solicitation and were subject to the SEC’s antifraud rules | Still considered a solicitation, but disclosures became less regulated |
| Advanced notice | Required proxy firms to provide companies with their recommendations before finalizing them | Rolled back the requirement to avoid making the proxy voting process too cumbersome |
| Conflicts of interest | Required proxy firms to report on every conflict of interest that could introduce bias | Relaxed this requirement to include only conflicts of interest material to the voting recommendations |
| Due diligence | Required institutional investors to complete due diligence on all recommendations from proxy advisory firms | Allowed institutional advisors to adopt the recommendations with lesser due diligence if the recommendations were made in clients’ best interest |
| Tailored proxy voting processes | Required institutional investors to adapt proxy voting recommendations to suit their clients’ specific needs and preferences | Maintained the focus on meeting clients’ needs but rolled back some of the most stringent requirements in the 2020 amendment |
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For years, proxy voting guidelines have felt like a moving target. Hitting the bullseye required boards, executives and institutional investors alike to keep up with shifting SEC guidance and mounting shareholder expectations. While analysts and advisors help, staying abreast of the latest news is a full-time job all its own.
Our proxy season checklist offers a solid seven-step process to help you proactively prepare for your next annual meeting. Like any process, however, it’s only as strong as your data. With Diligent Compensation & Governance Intelligence, part of the Diligent One platform, you’ll never miss a thing — including insights to improve shareholder engagement, enhance board effectiveness and gain clarity on ESG.
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