ETHICS
SHAREHOLDERS & THE PROXY VOTE
For the ethical investor who feels they must take an active role, simply selecting companies that reflect their views is not enough. These investors wish to actively shape the direction that companies are taking. In 1983, proxy wars filled the financial pages and affected numerous companies. Many investors do not fully understand how the proxy vote is used to shape the direction companies take. Few realize that shareholder activists use this mechanism to force corporations and their shareholders to consider their social responsibilities. You may wish to refer back to the section on "Gadflies" since this does tie in to that topic.
Typically, shareholder activists identify specific companies that do not meet their particular standards. Where many ethical investors would simply avoid investing in these companies, the shareholder activists attempt to reform them through education and by example. They primarily meet these goals through the shareholder resolutions, which appears on the corporation's proxy statement. These resolutions are the means by which the shareholder-owners control company policies. In fact, in the early 1970s, it was Ralph Nader, among other social reformers, who began using shareholder resolutions as instruments of social change. It still remains the most consistent tool for social reform.
Shareholder activism has much to do with ethical investing. When a person makes a positive statement through their investing, the cumulative effects are very noticeable to others. This brings additional ethical investors in and can have a snowball effect on the company. Simply investing ethically is usually not enough, however, to affect social change. That is where the shareholder activist comes in.
For the drive for corporate responsibility to have any real force, two things must happen:
1. Many shareholders must become aware of their duty to influence corporate actions, which is where the proxy mechanism comes in, and
2. Corporations that have not previously responded to the concerns of their shareholders must be made to face the issues in question. This does not mean that companies should give in without looking at all sides of the issues, but it does mean that the issues should be looked at. Very often, companies tend to ignore the situation entirely without ever giving it a fair hearing.
Proxy means the authority or power to act for another. In this text, proxy means the power of attorney to vote corporate stock. Apart from civil or criminal litigation, the only institutionalized mechanism existing that allows individuals to affect a corporation’s social awareness is the proxy.
By law, every corporation must hold annual meetings. This allows the owners of the company, which is its stockholders, to decide corporate policies through voting rights. It also allows the stockholders to have their say regarding who sits on the board of directors. It should be noted that each share receives a vote, not each shareholder. In other words, a person who holds 30 shares would also hold 30 votes. There is one vote per one share.
Many shareholders find the proxy to be a convenience, especially in small companies. It allows shareholders to skip the meeting and simply sign their votes over to another person or entity. This is done by simply signing a letter (often a pre-printed form) authorizing someone to vote his or her shares either in a particular manner, as indicated in the letter, or at the agent's discretion. By agent, we mean the person to whom the votes were assigned. If shareholder A assigns his votes over to shareholder B, then shareholder B is the agent for shareholder A. Shareholder A may now skip the meeting.
While a proxy may simply be a convenience for some stockholders, in large corporations, they are also a necessity. With thousands and thousands of shares, each receiving one vote, there would be no effective way to tally so many votes. It is most unlikely that every shareholder of extremely large corporations would attend the annual meetings. The proxy mechanism simplifies the process and allows it to flow smoothly.
The law requires the corporation to notify shareholders in advance of the annual meeting so that each shareholder knows the time and location as well as which matters are to be discussed. This letter takes the form of a proxy statement. That is a pamphlet that describes the candidates for the corporation's board and contains the text of the resolutions on which the shareholders will be voting. With this proxy statement will come a card, which is the actual proxy instrument. This card instructs the corporation as to how the shareholder wishes to vote. In order to vote, the shareholders must either attend the meeting to submit the card, or submit their proxies (the card) to the corporation before the meeting. As you might imagine, numerous shareholders have no desire or interest in actually attending the meeting.
There is still much debate regarding the social responsibility of corporations. Some have argued that the only responsibility of any corporation is to engage in profitable business within the laws and rules of the industry. It has been said that business', as a whole, cannot be said to have social responsibilities; that it is people who have social responsibilities. However, as we know, it is people who run the businesses. What this seems to come down to is a philosophical question. Such questions tend to be more a matter of opinion than fact.
Since the early 1970s, when management of companies reacted with outrage to social proxy resolutions, many advances have been made. In many companies there is the desire to cooperate and work for the good of the majority. Of course, not all companies wish to cooperate. This might especially be true if there seems to be major changes coming about as a result of the shareholder’s activism. Even so, it seems evident that corporations certainly realize the power such activists can bring about. More and more companies are demonstrating social concerns, perhaps as a result of shareholder activism.
It is amazing how many groups have moved into the area of social proxy activism. Certainly, they tend to be very active on social issues. Of course, not all the different religious groups necessarily agree on all issues, so sometimes votes are differing.
As we would expect, political groups are also very active in the proxy area. These groups often have specifically aimed goals in mind and pursue specific companies that relate to those social goals.
End of Chapter 18
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