How Your Vote Can Change Corporate Policy

By Stephanie Barton AAA

Many people believe that if you don't like the system, you should vote to change it. This also applies to a company in which you hold stock. Read on to find out how owning shares can give shareholders a voice and how they are speaking up.

Taking Stock of a Company
Making your voice heard as a shareholder is no short-term affair. You can't swoop in and buy a stock a week before the vote, make some noise about policy, and then sell your shares a week later. The U.S. Securities and Exchange Commission (SEC) states you must hold at least $2,000 in stock, or 1% of the outstanding shares, for a minimum of one year before the company's annual submission deadline before you can introduce a shareholder resolution for a proxy vote.

You must also follow specific SEC guidelines when you file a resolution. The resolution cannot exceed 500 words and it must conform to exact procedural and content requirements. Finally, the resolution must be filed by the deadline stated in the company's annual proxy statement - at least 120 days before the statement is released.

If your resolution is accepted, you or a representative will be required to participate in the shareholder meeting; if you miss the meeting without a valid cause, your proposal can be excluded by the company. The company has the option to exclude the resolution but is required to file its reasoning with the SEC no later than 80 calendar days prior to it submitting its proxy statement to the SEC.

Most shareholder resolutions won't win a majority of votes, but you can grab the attention of other shareholders, the board of directors (B of D) and the management. If you receive 3% of votes, you can resubmit your proposal the following year. You must win 6% of votes the second year and 10% every following year to continue submitting your resolution.

Even when a resolution wins a majority, the company is not obligated to make a change. The company may even ignore a successful resolution. That said, companies have grown more responsive to shareholder resolutions because investors have learned to make a strong business case about the issues they present, and corporations recognize the danger of community backlash when bad press leaks out about corporate policy.

Shareholders, Boards and Management
As a shareholder, you own part of the company in which you bought stock; in other words, you've provided the capital for the company to run its business. Shareholders elect the board of directors, which manages the corporation and makes business decisions. The directors choose the management, which handle the daily operations of the corporation. The board and the management should be working on your behalf.

A board of directors at a large public company, however, can often maneuver control of the vote. When institutional shareholders grant proxies to the board to vote their shares, the board can represent an overpowering voting bloc. (For related reading, see Proxy Voting Gives Fund Shareholders A Say.)

Individual and Institutional Investors
According to the InterfaithCenter on Corporate Responsibility (ICCR), institutional investors, such as pension funds and mutual funds, hold 65% of corporate stock in the U.S. If you own stock through a mutual fund, then the portfolio manager decides how to vote on resolutions; you have no individual voting rights.

However, you can exert pressure on your fund manager to vote in favor of certain resolutions. You can also write to your fund manager to let them know what issues are important to you and that you will be watching how they vote. Thanks to recent rulings by the SEC, mutual funds must now disclose how they vote on resolutions. (To learn more on this, read What Does Your Mutual Fund Say About You?)

The Winds of Change
More investors are making their voices heard about issues from executive compensation to human rights. State pension plans, socially responsible investors and religious investors are working together to change the policies of large and small corporations. Shareholders have used their votes to eliminate sweatshops, to promote human rights, to reduce fuel emissions, and to get more women into corporate boardrooms.

Social activist groups like Amnesty International have added their voice to the corporate decision-making processes as well, allotting part of their budgets to buy stock in companies where they hope to effect policy change. As a shareholder, Amnesty International has pressed companies to make changes to human rights policies and joined other investors to co-file resolutions on an array of issues.

The ICCR also uses investor pressure to hold corporations accountable for their decisions. Like Amnesty International, ICCR sponsors shareholder resolutions, meets with management, conducts public hearings, publishes special reports and sponsors letter-writing campaigns.

Awakening the Corporate Giant
In addition, shareholders' attempts to affect corporate policy have grown. According to the Council of Institutional Investors, in 1971, shareholders proposed only five resolutions about activist issues. In 1991, they submitted 350. In 2006, shareholders submitted approximately 600 activist proposals.

These proposals are not just falling by the way side. For example, in 2004, board of directors of Coca-Cola Bottling (Nasdaq:COKE) recommended a vote in favor of reporting on its efforts to respond to the HIV/AIDS pandemic. It was the first time COKE supported a shareholder-initiated resolution, according to ICCR. In 2006, 21 out of 75 environmental proposals, resulted in deals with companies, such as Lowe's Companies Inc.(NYSE:LOW) and General Motors Corp. (NYSE:GM) to provide reports on environmental impact.

Companies adopted 53% of shareholder resolutions that gained majority support in 2005, according to the Council of Institutional Investors. That's up significantly from an adoption rate of 8.2% in 2000.

Withholding Affection
While resolutions and votes apply direct pressure to corporations, shareholders have found other means of expression. More investors are withholding votes to make their voices heard in the boardroom. A decade ago, shareholder vote withholding was nearly unheard of.

At Home Depot Inc. (NYSE:HD), shareholders recently withheld at least 30% of their votes from 10 of the 11 directors up for re-election. The most famous example of shareholder withholding, however, is that of Michael Eisner and The Walt Disney Co. (NYSE:DIS). Eisner was forced to step down as chairman after investors withheld 43% of votes.

At most companies, withheld votes may not mean that a director loses a seat; one "yes" vote could mean the director still wins. But in the 2006 proxy season, more companies voluntarily adopted rules that require directors to get more "yes" votes than withheld votes, basically making a withheld vote a "no" vote. (To learn more about shareholder rights, read Knowing Your Rights As A Shareholder.)

The Other Side of the Coin
Corporations are quickly recognizing the power of their investors, and recent headlines show companies are trying to woo shareholders. In February 2008, Microsoft Corp. (Nasdaq:MSFT) hinted at spending up to $30 million to pursue a proxy fight to persuade Yahoo! Inc. (Nasdaq:YHOO) shareholders to vote for new board members who supported a takeover.

The Power of One Vote
Even if you never plan to file a resolution, your vote can still influence corporate decision-making. Pay attention to the resolutions on annual proxy statements and cast your ballot. If you can attend the annual meeting, you can question management directly about specific issues. The rise of shareholder advocacy over the past decade means that more investors are pressuring companies to be better corporate citizens. Every vote counts and you have the power to influence corporate policy.

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