Why We Need to Pay More Attention to Proxy Voting
Proxy voting is perhaps the most basic way that investors can share their stances on environmental, social and governance (ESG) issues with corporate management, yet it does not receive much attention in conversations about responsible investment, and even less so in the broader realm of social finance.
Proxy voting is an important channel to support social finance, because it allows shareholders to communicate to companies on how they should be run, including how they deliver social and environmental value alongside financial returns. Despite the fact that voting rights of shares in companies are critical assets for shareholders, many fiduciaries often do not pay enough attention to how their proxies are voted. Last year, for instance, I gave a presentation to a group of more than a hundred individuals responsible for overseeing institutional pools of capital, and almost none of them knew how their proxies were voted.
This reality sheds light on how proxy voting has traditionally been managed in Canada on behalf of institutional investors – investment managers typically assume responsibility for voting the proxies tied to company shares, with very little guidance or oversight from their clients on how issues should be analysed and voted upon. For example, in 2012, 79% of investment managers and proxy service firms that participated in SHARE’s annual proxy voting survey exercised complete discretion on most of their pension plan clients’ Canadian equity assets.
The result of this tendency is that there is a greater propensity for investment managers and proxy service firms to simply vote with management on proxy voting issues. Indiscriminate voting with corporate management is indicative of insufficient shareholder scrutiny over important proxy issues such as executive compensation or environmental risk management.
However, this trend appears to be slowly shifting as investors increasingly recognize how their ESG values are embedded in their investment decisions, and that proxy voting provides an opportunity for them to communicate their expectations. Two key votes from 2012 serve as important examples.
The first is a shareholder proposal put forward by NEI Investments at Enbridge Inc., asking the company to report on the risks associated with First Nations’ opposition to the Northern Gateway pipeline. Nearly 30% of shareholders voted for the proposal, noting that First Nations’ consent plays a pivotal role in the future of the Enbridge project. Surely in order to understand the investment risks associated with the Northern Gateway pipeline, shareholders need to hear from the company whether it intends to pursue the project regardless of community opposition. If it does, how will it deal with the operational, reputational and legal risks of such opposition?
The vote result at SNC-Lavalin is also an important example. At the company’s shareholder meeting in May 2012, nearly one-quarter of votes were lodged against the executive compensation package offered to former CEO Pierre Duhaime, which included $1.9 million in salary continuance plus other benefits.
This generous severance package was offered despite the ongoing criminal investigation into corruption and bribery charges, both in Canada and Libya, during Mr. Duhaime’s tenure. In the realm of proxy voting, a vote of 25% against a severance package is a strong show of shareholder opposition. But one still wonders how more than 75% of shareholders voted in favour of the former CEO being rewarded so generously despite the significant loss in shareholder value on his watch.
The above two examples, while illustrative of growing shareholder recognition of the importance of ESG issues, indicate that investors in Canada have more to do to ensure that their proxies are being voted responsibly. We must get the basics right, including making sure that fiduciaries know how proxy issues are being voted on their behalf, if we are to successfully change the way institutional assets are managed in Canada to deliver greater social and environmental benefits alongside financial returns.
How did your proxy voting service provider vote on the most important proxy issues of 2012? Find out here.