Proxy Voting - Corporate Settings

Corporate Settings

Under the common law, shareholders had no right to cast votes by proxy in corporate meetings without special authorization. In Walker v. Johnson, the Court of Appeals for the District of Columbia explained that the reason was that early corporations were of a municipal, religious or charitable nature, in which the shareholder had no pecuniary interest. The normal mode of conferring corporate rights was by an issue of a charter from the crown, essentially establishing the corporation as a part of the government. Given the personal trust placed in these voters by the king, it was inappropriate for them to delegate to others. In the Pennsylvania case of Commonwealth ex rel. Verree v. Bringhurst, the court held that members of a corporation had no right to vote by proxy at a corporate election unless such right was expressly conferred by the charter or by a bylaw. The attorneys for the plaintiff argued that the common law rules had no application to trading or moneyed corporations where the relation was not personal. The court found, "The fact that it is a business corporation in no wise dispenses with the obligation of all members to assemble together, unless otherwise provided, for the exercise of a right to participate in the election of their officers." At least as early as the 18th century, however, clauses permitting voting by proxy were being inserted in corporate charters in England.

Proxy voting is commonly used in corporations for voting by members or shareholders, because it allows members who have confidence in the judgment of other members to vote for them and allows the assembly to have a quorum of votes when it is difficult for all members to attend, or there are too many members for all of them to conveniently meet and deliberate. Proxy firms commonly advise institutional shareholders on how they should vote. Proxy solicitation firms assist in helping corral votes for a certain resolution.

Domini notes that in the corporate world, "Proxy ballots typically contain proposals from company management on issues of corporate governance, including capital structure, auditing, board composition, and executive compensation."

Proxies are essentially the corporate law equivalent of absentee balloting. Shareholders send in a card (called a proxy card) on which they mark their vote. The card authorizes a proxy agent to vote the shareholder's stock as directed on the card. The proxy card may specify how shares are to be voted or may simply give the proxy agent discretion to decide how the shares are to be voted. Under Securities Exchange Commission Rule 14a-3, the incumbent board of directors' first step in soliciting proxies must be the distribution to shareholders of the firm's annual report. An insurgent may independently prepare proxy cards and proxy statements, which are sent to the shareholders.

Associations of institutional investors sometimes attempt to effect social change. For instance, several hundred faith-based institutional investors, such as denominations, pensions, etc. belong to the Interfaith Center on Corporate Responsibility. These organizations commonly exercise influence through shareholder resolutions, which may spur management to action and lead to the resolutions' withdrawal before an actual vote on the resolution is taken.

In the absence of his principal from the annual meeting of a business corporation, the proxy has the right to vote in all instances, but he has not the right to debate or otherwise participate in the proceedings unless he is a stockholder in that same corporation.

The Securities Exchange Commission has ruled that an investment adviser who exercises voting authority over his clients' proxies has a fiduciary responsibility to adopt policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of clients, to disclose to clients information about those policies and procedures, to disclose to clients how they may obtain information on how the adviser has voted their proxies, and to keep certain records related to proxy voting. This ruling has been criticized on many grounds, including the contention that it places unnecessary burdens on investment advisers and would not have prevented the major accounting scandals of the early 2000s.

It is possible for overvotes and undervotes to occur in corporate proxy situations.

Even in corporate settings, proxy voting's use is generally limited to voting at the annual meeting for directors, for the ratification of acts of the directors, for enlargement or diminution of capital, and for other vital changes in the policy of the organization. These proposed changes are summarized in the circular sent to shareholders prior to the annual meeting. The stock-transfer book is closed at least ten days before the annual meeting, to enable the secretary to prepare a list of stockholders and the number of shares held by each. Stock is voted as shown by the stock book when posted. All proxies are checked against this list.

It is possible to designate two or more persons to act as proxy by using language appointing, for instance, "A, B, C, D, and E, F, or any of them, attorneys and agents for me, irrevocable, with full power by the affirmative vote of a majority of said attorneys and agents to appoint a substitute or substitutes for and in the name and stead of me."

Proxy voting is said to have some anti-deliberative consequences, in that proxy holders often lack discretion about how to cast votes due to the instructions given by their principal. Thus, they cannot alter their decision based on the deliberative process of testing the strength of arguments and counter-arguments.

In Germany, corporate proxy voting is done through banks. Proxy voting by banks has been a key feature of the connection of banks to corporate ownership in Germany since the industrialization period.