Election season is just around the corner, giving Americans their annual chance to determine the leaders and policies governing our most hallowed of institutions:
Publicly traded companies.
Wait. What elections did you think I was talking about?
All jokes aside, spring is an important time for Main Street and Wall Street alike. While the former is well in the throes of its political primaries, the latter is gearing up for its own elections – a period called "proxy season."
And today, I'll talk to you about why proxy season is so important and whether or not you should vote.
What is proxy season?
Proxy season is a period during which publicly traded companies typically hold their annual meetings. During this time, they present shareholders with the opportunity to vote on various matters affecting the company's direction, ranging from electing board members to deciding to adopt greenhouse gas targets.
Of course, most of a company's many investors can't (or don't want to) actually spend the time physically traveling to the meeting, so most vote by proxy – that is, they vote without being present.
Hence, "proxy season."
Proxy season typically occurs in the spring, though it can extend throughout the year depending on a company's fiscal calendar. During this time, shareholders receive proxy materials, which include …
A notice of shareholders' meeting: Informs shareholders about the upcoming meeting, including when, where and other important details
A proxy card: What the investor uses to express how they want to vote; it will also include voting instructions
A proxy statement: Provides information about the matters to be voted on
An annual report to shareholders: Typically includes financial statements, operational results, and management's message(s) to shareholders
Voters long submitted their proxy ballots via mail, and eventually phone, though as you'd expect, online voting is becoming increasingly popular. The company typically establishes a cutoff time for votes to be submitted – often 24 hours before the meeting.
If you own the common stock of a company, chances are you have voting rights. But there are exceptions. Some companies issue non-voting stock – for instance, Google parent Alphabet's GOOGL shares have voting rights, but its GOOG shares don't.
In other cases, your voting rights are significantly diluted. Meta Platforms' (META) 2.2 billion outstanding shares enjoy one vote apiece, but CEO Mark Zuckerberg's 344 million or so Class B shares get 10 votes apiece, giving him majority control and the ability to veto any vote.
What do shareholders vote on?
Proxy votes can cover numerous topics, though they typically relate to corporate leadership and policies. Here are a few of the most common categories:
Board of directors: The board of directors plays a critical role in overseeing company management and strategic decision-making. A shareholder may vote to elect new directors or re-elect existing ones, depending on their performance and whether they're aligned with the shareholder's interests.
Activist investors with significant stakes frequently use proxy season to get hand-selected directors voted onto the board – efforts often dubbed "proxy battles" or "proxy fights" – where they can help push for the activist's desired changes. For instance, billionaire Nelson Peltz recently waged a high-profile proxy war against Walt Disney (DIS), though it ultimately failed, with shareholders failing to elect his director picks.
Executive compensation: Shareholders also vote on executive compensation packages, including salaries, bonuses, stock options, and other incentives for top executives. These votes – typically referred to as "say on pay" – is essential for ensuring that executive pay is fair and tied to company performance.
Corporate governance policies: Corporate governance policies generally exist to hold directors (and through the directors, corporate management) accountable to the company and its shareholders. These policies typically deal with transparency, board independence, ethical behavior, shareholders' rights, and governance guidelines.
Environmental and social (E&S) proposals: Corporate governance is the "G" in "ESG," and environmental and social proposals make up the rest.
While ESG is experiencing something of a backlash in recent years, proposals related to corporate sustainability, diversity and inclusion initiatives, and corporate social responsibility (CSR) practices, are still extremely commonplace. Examples of these proposals range from racial equity audits to increased disclosure of climate lobbying to assessing how a company can reduce its plastic use.
Mergers and acquisitions (M&A): If a company is considering a merger, acquisition, spinoff, or some other significant corporate transaction, shareholders often must be asked to approve or reject the proposed deal. In some cases, it's mandatory.
For instance, the New York Stock Exchange and Nasdaq enforce a 20% rule, where a publicly traded company can't issue 20% or more of its outstanding common stock or voting power without first securing shareholder approval.
Auditor selection: Shareholders vote on the selection of an independent auditor to review the company's financial statements and ensure compliance with accounting standards. Independent auditors help maintain the integrity and transparency of the company's financial reporting.
Shareholder proposals: Proposals aren't just doled out from on high – shareholders also have the right to submit proposals for consideration during proxy season. And these proposals can include anything mentioned above, and more.
Should you vote?
In a word, yes.
Many more people should vote, in fact. Despite its importance, proxy voting has low participation rates among individual investors.
"While institutions such as pension funds and hedge funds rarely miss a shareholder vote, individual investors have far lower participation rates," says the Financial Industry Regulatory Authority (FINRA). "Typically, somewhere between a quarter and a third of retail investors participate in shareholder voting, as opposed to around 90 percent of institutional investors."
And even when they do vote, shareholders either ignore proxy materials altogether or blindly follow management's recommendations without conducting their own due diligence.
It's easy to get caught up in the numbers and assume that because you have so few votes, your vote or votes don't matter. But like with our political elections, crucial decisions can ultimately come down to just a handful of votes.
Voting is power, whether it's in politics or corporate policy. Your vote is your voice – one you can use to sound off on crucial decisions that directly impact the company's direction, governance, and ultimately, its financial performance. When you exercise your vote, you're holding management accountable.
When you don't, you're giving the board free rein to do as they please … even if they're not necessarily doing what they should.
