Proxy voting 101

Shareholder meetings#

Public companies hold a shareholder meeting at least once a year, usually called the annual meeting. At the meeting, shareholders elect the board of directors and vote on other matters. Typical items include ratifying the company's auditor, an advisory vote on executive pay (say-on-pay), changes to the company's charter or bylaws, and shareholder proposals submitted by investors. A company can also call a special meeting between annual meetings, for example to approve a merger.

Before the meeting, the company sends shareholders a document describing the matters up for a vote. In the United States, that document is called a proxy statement. In Canada, it’s a Management Information Circular. Different countries have different names for these documents and different requirements for what kinds of information must be included in them. In the United States, the proxy statement is filed with the Securities and Exchange Commission (SEC).

In the early days of corporations, shareholders were required to attend and vote in person. As ownership of companies became more diffuse, the rules were relaxed so that shareholders could delegate their voting authority to a person or entity to vote on their behalf (by “proxy”). Today most voting happens before the meeting. Beneficial owners send voting instructions to their broker, which holds the shares on their behalf and votes them by proxy according to those instructions. The investor is not granting a proxy directly, but the whole process is still called proxy voting.

Why investors receive ballots#

Owning common stock usually comes with the right to vote, generally one vote per share, although some companies have share classes with different voting rights. The board sets a record date ahead of each meeting. Every investor who holds shares on that date is entitled to vote, even if they sell the shares before the meeting takes place, and ballots go to everyone who held shares on that day.

When an investor holds stock through a fund, the fund owns the shares and votes them, usually through its investment adviser. Fund investors do not vote on the underlying companies unless the fund offers pass-through voting or another form of voting choice. Funds do hold shareholder meetings of their own from time to time, for example to elect trustees or approve a change to the advisory agreement, and investors who hold fund shares on the record date are entitled to vote at those meetings.

Investors may hire asset management firms to oversee their portfolios. In these arrangements, voting authority is typically set out in the investment advisory agreement. In the United States, investment advisers commonly assume voting authority on behalf of their clients, but investors can keep that authority for themselves if they wish.

How voting works through brokers and custodians#

Most investors do not appear on a company's shareholder list. A registered owner holds shares directly in their own name on the company's records. A beneficial owner holds shares through a broker, bank or other custodian, often described as holding shares in "street name." Most investors hold their shares this way.

Because the company's records show the intermediary rather than the investor, ballots for beneficial owners travel through a chain. The company provides its meeting materials to the custodians that hold its shares. Custodians generally rely on a proxy processor to deliver the materials to each beneficial owner, collect their voting instructions, and submit the combined votes for tabulation.

A beneficial owner does not receive a proxy card from the company. Instead, they receive a voting instruction form (VIF), which tells the custodian how to vote the shares held on their behalf. Registered owners receive a proxy card and vote directly. VIFs often look and function like ballots, listing items to be voted on and available voting options. VIFs can take physical or electronic form.

Timing matters. Votes must be submitted before the meeting, and intermediaries set their own cutoffs, often a day or more before the meeting date, so that votes can be totaled and passed along in time. An instruction that arrives after the cutoff may not be counted. In the United States, if a beneficial owner gives no instruction, the broker may vote the shares on certain routine items, such as ratifying the auditor, but not on non-routine items, such as director elections or executive pay. Shares left unvoted this way are called broker non-votes.

Institutional investors that manage many accounts receive ballots for thousands of holdings across several custodians, with many meetings on the same day during peak season. They typically use voting platforms (such as iconik) that are connected to the proxy processor to review and submit votes across all of their accounts.

What a voting policy does#

A voting policy is a set of rules that decides how shares are voted. Each rule states a position on a type of proposal: for example, vote against executive compensation packages that pay more to executives when the company has been underperforming for several years, or vote for proposals that seek a report on the company’s political activities. When a ballot arrives, the policy is applied to each item, and the result becomes the vote.

A policy works as a standing instruction. Instead of reading every proxy statement, an investor decides their positions once, and the same rules are applied consistently to every meeting until the investor changes or pauses them. This makes it easier to vote every ballot, and creates a record of why each vote was cast.

Investors can write their own policy or start from a preset, a ready-made policy that reflects a particular approach. Some combine the two, adding their own rules on the topics they care about most and relying on a preset for everything else.

No policy anticipates every proposal. A default rule covers the items that an investor's other rules do not address, for example by voting in line with the board. Knowing which rule decided each vote is what makes a policy auditable: an investor, trustee or reviewer can trace any vote back to the rule that produced it.

Institutions that vote for clients also have formal obligations. In the United States, investment advisers that vote on behalf of clients must adopt written proxy voting policies and procedures, and registered funds report their votes each year on Form N-PX.

iconik applies each client's own voting policy to their ballots and executes the votes.