Transparency is creating retail shareholder proxy voting apathy
Last week’s blog post briefly discussed the decline in retail shareholders voting proxies and why corporate issuers might want to engage retail shareholders. Several papers have documented and explored reasons for retail shareholders proxy voting apathy and the apparent indifference to exercising their rights in corporate governance. In addition to Ian Robertson’s 2018 paper making a case for retail shareholders disassociation with their equity holdings, Yaron Nili and Kobi Kastiel argue that costs to retail shareholders or the resources required to assess proxies outweigh the shareholders’ benefits from voting. They specifically identify three trends that have shifted affected retail shareholders in voting.
- Companies must provide more disclosures across multiple issues, increasing required resources to assess the issues and how to vote.
- Regulators and activist shareholders are forcing more issues to a shareholder vote, again increasing shareholder time and effort required in deciding how to vote.
- Retail shareholders today hold a broader and more diversified portfolio, which translates to more holdings and more board meetings.
Put simply – this information overload creates apathy.
Issuers and activist shareholders need retail shareholders to engage
Institutional shareholders frequently use proxy advisors to develop their voting policies, summarize proxy issues and make recommendations on how to vote. Consequently, institutional shareholders tend to vote in line with other institutional investors. Given that institutional investors vote 92% of their shares, corporate issuers and activist investors need convert retail shareholders if they want to move the needle on a particular issue. In survey in 2014 Russell 3000 contested elections, Nili and Kastiel found a change in outcome would have been theoretically feasible if voting turnout had been higher in 47.6% of cases. In 28.5% of the cases a change in outcome would have been highly likely as the percentage of shareholders that did not vote was more than 3x the votes percentage needed to change the results.
Leveraging behavioral economics to improve proxy voting
Overcoming retail shareholder proxy voting apathy requires resolving information overload, reducing required resources and making voting easy. As Nili and Kastiel point out, the first step to improving retail shareholders’ voting rates is to default them into a voting program. The second step is to build a voting policy based on the shareholder’s stated values and priorities. Third, for each shareholder proposal layout the issues in clear, concise language summarizing alignment with the shareholder’s values and priorities. Finally, show the shareholder the default vote based on their personal proxy policy, allowing the shareholder to change the vote or submit. This approach allows shareholders to make a choice, while supporting those that do not want to decide each time.
The point at which to opt out is important. Ideally, everyone would be defaulted into the program to attract attention. By increasing the visibility of potential choices aligned with the shareholder’s interests and voting shortcuts, retail shareholders are more likely to engage. Increased engagement along with a better understanding of retail shareholders’ values and priorities will help issuers and activist shareholders better understand a key constituency and may inform some of their corporate governance decisions or initiatives.
