ProxyDemocracy Blog

I gave a talk on how the internet was changing shareholder engagement at the Yale Governance Forum last week. In order to demonstrate the proliferation of outstanding and cheap communication tools, I used Google Docs to create my presentation and have published it here. Check out the “speaker notes” to see my comments about each slide.

We do our best to provide accurate data, but things do go wrong. There’s so much data on our site that we can’t realistically check every vote by hand. A few weeks ago some folks from Barclays pointed out a few mistakes in their vote record, and I fixed them soon after. But we decided that the process of reporting problems should be made easier as a way of improving overall data integrity.

Today we’re introducing a new feature allowing users to report errors they find in the data. If you look at any proposal (here’s one), meeting (here’s one), or company (here’s one), you’ll see the words “Report a problem with this data” at the bottom of the page, which opens up a little box for you to summarize the problem and optionally leave contact information. I’m hoping people will use this feature to report problems when they arise (I know I will) so that all of us can benefit from better data.

I’m proud to introduce Larry Crane-Moscowitz, who is working for ProxyDemocracy this summer. Larry is a rising junior at the University of Pennsylvania’s Wharton School, and he comes to us via New Sector, which pairs talented undergrads with Boston-area nonprofits for summer consulting gigs. One of the great parts about the New Sector program is the amount of support the fellows get: Larry attends biweekly training sessions and learning groups with other summer fellows, and he is getting great direction from Bain & Co consultant Dennis Huggins. I think Larry’s survey work and other research will really help ProxyDemocracy identify ways in which we can be more effective in pursuing our mission going forward. Welcome Larry, and thanks to New Sector and Bain & Co!

Lucian Bebchuk asked me to write a guest post about ProxyDemocracy on the Harvard Law School Corporate Governance Blog. Here’s the post; I will repost here for convenience. Thanks to Lucian and blog editor Andrew Tuch for the opportunity.

Financial Week published an excellent article last month about the impact of the “broker vote” on shareholder activist campaigns. Many retail investors don’t realize this, but when you fail to send in your voting instructions, your broker votes on your behalf. In the past, brokers cast these “uninstructed” votes for management, which tends to stack the deck against shareholder activists. But changes are afoot that will have an effect on voting results and, by extension, board behavior. 

One proposal that has been discussed by the NYSE is to exclude broker votes on director nominations. Broker votes are already excluded for the most part on shareholder proposals, but the rules allow them on “routine” matters. Director nominations have been classified as routine, and thus broker votes have ben included. But a proposed rule change released by the NYSE in 2006 would reclassify director nominations as non-routine, which would exclude broker votes. The change has yet to be approved by the SEC.

Meanwhile, brokers are making changes that may obviate the need for restrictions on the use of broker votes. Brokers have traditionally voted uninstructed shares on management’s side, but there was no rule requiring that they do so. A few brokers (I believe Schwab was the first) have adopted “proportional voting” instead, which means that the uninstructed shares are cast to reflect the sentiment of the instructed shares. In other words, if the Schwab clients who vote cast their shares 75%-25% in favor of a director, all Schwab clients’ shares will be voted 75%-25% in favor of that director. The FinancialWeek article tells us that three more big brokers – Merrill Lynch, Goldman Sachs and Morgan Stanley — adopted proportional voting in March of this year. According to sources in that article, the SEC may eventually require brokers to use this system.

Proportional voting greatly amplifies the voting power of individual investors who actually vote. If 20% of retail investors vote, as has been the case in recent years, your vote is worth 5 times as much under proportional voting as it would be otherwise. (This is assuming that turnout is not correlated with holdings among retail investors.) Proportional voting makes it even more important that retail investors cast an informed vote, which is where ProxyDemocracy is trying to help. 

I’ve been recognized as a “Millstein rising star of corporate governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management. The announcement I received is below.

It’s really gratifying to be recognized for the hard work that’s gone into ProxyDemocracy. Credit should also go to Roop Roy, who helped immensely with website development, Mark Latham, a board member and intellectual patron saint of the project, Mark Orlowski, a board member wise beyond his years in the ways of running a small nonprofit, and Nicco Mele, board member and net evangelist. Also to Dan Giffin, Andy Felton, Becky Warren, and John Zedlewski, who helped out early on. And of course our funders, particularly Janet Shenk of the Panta Rhea Foundation, who took a chance in supporting the project and showed admirable patience. And Emily Coit who put up with a lot of late-night coding and general Sturm und Drang. And my parents. I could go on with this list, believe me.  

The award recognizes young professionals new to corporate governance, from the many bodies that comprise the global world of corporate governance, who are making an impact as outstanding analysts, experts, activists, or managers. Candidates were assessed on criteria such as past accomplishments and thought leadership; future projects and endeavors; reputation among existing industry leaders; and potential to influence the industry in the future. All honorees were nominated by a member of the governance community for their sterling work. 

The Millstein Center for Corporate Governance and Performance, in collaboration with its partners in the selection process, the Open Compliance and Ethics Group and The International Corporate Governance Network, recognizes you for your outstanding work and congratulates you on this honor.

In a previous post I explained how my time at Harvard Business School got me interested in mechanisms shareholders use to hold corporate management accountable. In this post I’ll talk about how Mark Latham’s ideas provided the direct impetus for starting work on ProxyDemocracy.

I encountered Mark Latham quite by chance at a May 2003 conference of Transparency International in Seoul, which I was attending in connection with my work on transparency at Brookings. I was mostly busy with my own meetings at the conference but somewhat on a lark decided to attend a session on corporate governance that Mark was holding. I was impressed by Mark’s talk, in which he focused on free-rider problems shareholders face in monitoring management, and spoke with him briefly afterwards; after returning home I read some of the work on his website. The following spring, as I was wrapping up my work at Brookings and getting ready to move on to graduate school, I got in touch with Mark asking if he knew of resources that could help me vote the stock I held in Ford. Mark and I struck up a correspondence (I actually presented his corporate monitoring proposal at a USEC shareholder meeting held in DC that spring) and I continued to think about the ideas he had written about.

In work he had started publishing in the late 1990’s (particularly his paper “The Internet Will Drive Corporate Monitoring”; see all of his papers here), Mark was exploring mechanisms by which shareholders could overcome the collective action problems they face in monitoring corporate management. His vision was that shareholders should elect a “corporate monitor” that would look out for shareholder interests by investigating the performance of the board and senior management. Mark’s key insight was that this shareholder-elected monitor should be paid with corporate funds, which means that shareholders would all collectively pay for the service and the free-rider problem would be solved. With a single, investor-elected monitor doing research on behalf of shareholders (rather than a few proxy advisors doing fee-based research on behalf of a minority of the shareholders and most shareholders investing nothing in oversight), more resources could be devoted to ensuring that shareholder interests are represented. (Mark has since expanded this idea to civic politics and is now advocating the more general concept of “voter-funded media.”)

I thought Mark’s corporate monitoring idea was elegant and interesting, but it seemed to me that there were much more modest steps that should be taken first. In particular, Mark had pointed out in “The Internet will drive corporate monitoring” that a handful of institutional investors had started publishing their intended proxy votes on their websites in advance of shareholder meetings. He predicted that software would emerge to allow investors to automatically mimic the voting decisions of these institutional investors, as well as other trusted sources including security analysts, environmental groups, and journalists. It seemed to me that creating these linkages between specialists and otherwise-passive individuals was a manageable medium-term goal, and perhaps a necessary first step toward further innovations that he and others were proposing. Even if it wasn’t possible to actually implement the automated voting, we could at least help shareholders find out how CalPERS and others planned to vote.

This was the idea that led me to start working seriously on the project that became ProxyDemocracy, in early July of 2004. Being inexperienced and stupid, I thought I could finish the website before entering graduate school in September of that year. Next time I’ll tell you whether that worked (hint: no).

Short attention span version: We’re now displaying the reasons institutions provide for their votes. For example, see the June 11, 2008, meeting of Caterpillar Inc here; CalPERS provides reasons for its votes on each of the shareholder proposals. At this point only CalPERS is providing reasons for its votes, but we think more institutions will (and should) follow their lead.

Longer version: ProxyDemocracy offers advance notice of how respected institutional investors plan to vote at upcoming shareholder meetings. The idea behind providing this service is that investors can use this information to vote their own shares more intelligently. 

In some cases, it’s enough to know what the institution’s vote was. If you know something about the institution and its voting record, you might be able to assume that you would agree with the reasons for its position on a particular proposal.

But just as we might we might want to know why the Sierra Club endorsed a particular candidate before following its recommendation, often we’d like to know why an institution plans to vote a certain way on a proposal we face before we cast our vote the same way.

A select few institutions are now making publicly available the reasons for their votes, along with the votes themselves, in advance of meetings. We currently provide votes for one such institution — CalPERS, the California public employee pension fund. As of today we’ve started making available the reasons for their votes. I find these reasons to be very useful, particularly when the content of the proposal is not clear from the brief proposal title we are given, or for director nominations where CalPERS will back up its withhold vote with an explanation that the director serves on too many other boards or has attended too few meetings.

Some interesting ones I found:

• CalPERS explains that it voted against Steve Jobs on the Disney board because he missed too many meetings.
• CalPERS explains why it opposed a proposal asking Google’s board to create a committee on human rights issues.
• CalPERS explains that it opposed a director at the Lowe’s meeting today because he sits on too many other boards.

Let me know if you find anything interesting (or wrong) in the new data.

ProxyDemocracy’s main target audience is retail investors — individuals who own stocks or mutual funds. As I’ve worked on this project over the last couple of years, I’ve done research at various points to determine how much equity is owned by different types of investors. It’s surprisingly hard to find numbers on this. I think I have good numbers now but please let me know if you know of better figures.

The main source I use is the Flow of Funds data released quarterly by the Federal Reserve. Table L 213 records the equity holdings of different types of investors — households, mutual funds, private and public pension funds, etc.

As of the fourth quarter of 2007, US households own about a quarter of US equity, and mutual funds own almost exactly the same amount. Household equity holdings have shrunk somewhat since 2003, but mutual fund holdings have grown; together they owned about half of US equity in both years.

Now, some individual investors are foreign, so the total rate of retail investors in US equities is somewhat higher than 25%, although I’m not sure how much. I would guess that foreign holders of US equity are somewhat more institutional than are domestic holders; that would add another 3% to the 25% of holders who are US retail investors.

The bottom line is that a little over a quarter of US equity is owned by domestic and foreign retail investors. Another quarter is owned by mutual funds, which means that ProxyDemocracy’s audience owns over half of US equity, directly or indirectly. As we add pension fund voting data (currently we only have CalPERS), we add another 10% or so to that figure.

I created a treemap of the Federal Reserve data on Many Eyes; WordPress apparently won’t let me embed the visualization in the blog (grrr), but you can click on the miniature version of it below to see and interact with the full visualization (and download the data). The blue block in the tree map represents the equity holdings of US households.

Jim McRitchie, the editor of Corpgov.net, asked me to tell him a little about the intellectual roots of ProxyDemocracy for a piece he is working on. Since others might be interested, I figured I would blog here about the origins and history of the project. Writing history at this point seems a little presumptuous, given that we just publicly launched, but the project has been a long time coming (somewhat embarrassingly long) and many debts have been incurred along the way.    

The short story is that the intellectual ground was laid for ProxyDemocracy during the year I spent as a research assistant for Professor Malcolm Salter of the Harvard Business School, and the seed was planted by the writings of Mark Latham, whose ideas on technological solutions to shareholders’ collective action problems were the direct inspiration for the project. The early part of cultivation (forgive the extended botanical metaphor) relied on some volunteer help by a few programmer friends, and the project ultimately bore fruit because I learned to program, raised some money, and hired a great developer to help me. In this post I’ll relate the first part of the story, and I’ll get to the rest later.

When I graduated from Harvard in 1999 I took a job as a research assistant for Malcolm Salter, a corporate governance professor at the Harvard Business School. Mal needed someone to help write cases about ongoing changes in Japanese corporate governance practices, and while I knew nothing about corporate governance I was good at Japanese and knew how to write and do research, so the match worked. As I began to immerse myself in this new area by working through books and papers on corporate governance and attending Mal’s class “Governance and Corporate Control,” I was surprised by how much I became genuinely interested in the issues at stake. 

What interested me was essentially the same set of puzzles that Berle and Means had written about in 1932: the fundamental conflict between what owners and managers want, and the difficulty shareholders face in creating mechanisms to resolve that conflict. For me, the signal issue was executive pay, which Mal’s class handled in a number of excellent cases. The potential conflict between shareholder interests and manager interests here is obvious, and it seemed to me that much of the talk about the “war for talent” that justified eye-popping payouts was bogus. An array of mechanisms theoretically constrained the worst self-dealing, but it was unclear how well they actually worked.

In Mal’s class I came to appreciate the primary importance of the securities market as a constraint on management: if shareholders are unhappy with managers’ behavior, they can sell their stock; directors and managers don’t want this (primarily because it hurts their own wealth, but also because it makes the company a better takeover target), so they will try to keep shareholders happy. But it was also clear that major information problems made this channel of accountability weak. Not only was it difficult for shareholders to know the extent of the compensation CEOs were receiving, it was also hard for directors to know why shareholders were selling stock, and inside management was unlikely to tell them that it was because of CEO compensation.

In my work at HBS I also encountered the idea that activist investors could successfully fight for shareholder interests. Mal’s class spent a lot of time discussing the slash-and-burn tactics of LBO artists like KKR, but it also devoted attention to the lower-profile efforts of institutional investors like CalPERS to create shareholder value by pushing for governance reform. I came away thinking that the efforts of shareholder activists could be an important way of making sure that corporate executives were putting their investors’ priorities first, which was later an inspiration for ProxyDemocracy.

Next time: Mark Latham and the launch of the project.