For the Price of One Share of Stock, You Could Influence a Billion-Dollar Company
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Let's begin with a quick story about foam cups.
McDonald’s recently decided to stop using plastic foam cups by the end of 2018, and create a plan to use recycled sources for all fiber-based packaging by 2020. What drove this change? The impetus came last year when shareholder activists pushed McDonald’s to assess the environmental damage caused by using foam containers. The shareholder resolution aimed at ending foam container usage received 32 percent of votes at the McDonald’s annual meeting. Although less than a majority of shareholders voted in favor of the resolution, which was not binding, the company decided to act.
This initiative, driven by shareholders and acted upon by the company, turned out to be a win for pretty much everyone on earth. In a competitive fast-food market, and wanting to avoid similar resolutions at their companies, other fast-food providers are expected to follow suit.
When you invest in a company, you become an owner. Ownership is represented by a share of stock, which is an economic interest coupled with the right to weigh in on issues affecting the company. This currently takes place by a process called proxy voting, where shareholders fill out forms and vote shares at annual or special meetings of shareholders, averaging about one vote per year per share, though companies hold their votes at different times.
This process can be confusing and time consuming, resulting in low voter turnout amongst retail shareholders, who are everyday investors -- think of anyone with an Acorns, Betterment or Robinhood account. But retail shareholders’ votes have more power than most realize.
Retail shareholders hold about 35 percent of the value of the stock market, yet only vote at a rate of around 27 percent. Institutional shareholders -- asset managers, pension funds and other very large shareholders which in turn have their own stakeholders -- hold the remainder of the shares in the market and vote at rate of about 86%. The overall voting rate, however, is 65 percent, meaning retail shareholders still make up a meaningful portion of non-voting shareholders.
Shareholder voting has become a confused yearly process dominated by a subset of highly active institutional shareholders. Due to the high barriers that deter retail shareholders from participating in our system, retail shareholders get sidelined, although the McDonald’s example shows the power everyday shareholders can wield to effective productive change.
A look back at shareholder engagement.
On January 14, 1922, the New York Times reported on an extraordinary event. Adam Brown, a 95-year-old retired postmaster attended his sixty-fifth annual meeting of stockholders of the Canada Life Insurance Company. According to the report, the president of Canada Life indicated that, for his comfort, Mr. Brown need not stand to make a motion at the meeting.
Slightly indignant at the suggestion that he remain seated at his sixty-fifth appearance, Mr. Brown responded: “Got up at 6 o’clock, as usual, to attend the meeting. See no reason why I can’t stand.”
An article in the August 24, 1913, edition of the New York Times described “a novel way of insuring big attendance” at shareholder meetings of the Boston & Albany Railroad. Their stock certificates doubled as a ticket, good for a round trip from any point on the company’s lines to Boston where the meeting was held. To get as many free tickets as possible, Boston & Albany shareholders took care to register shares in the names of each of their family members.
Certificates in hand, entire families would board Boston & Albany trains to Boston where some would “shop and see the sights,” while others would “help advise the Directors for a few minutes.”
On the front page of the October 25, 1917, issue of the Wall Street Journal, a report was published about the annual meeting of the New Haven Railroad. The proceedings were lively, and “in spite of a heavy downpour” the meeting was “packed as usual with stockholders.” One stockholder by the name of Walter Leigh even made motion to open the meeting with a prayer “For us all and the New Haven [Railroad] in particular.”
It is easy to idealize the past, and conditions certainly weren’t perfect for shareholders then. After all, the Great Depression, caused in part by unscrupulous corporate behavior, was just around the corner but being a shareholder plainly used to mean something different than it does today. It used to mean share certificates doubling as railway tickets, and whole families taking the day to travel to the meeting, riding in trains operated by the company to which they’d entrusted their money. It meant 95-year-old retired postmasters, who became shareholders before the Civil War began, waking up at six in the morning to attend their sixty-fifth consecutive meeting. It meant packed halls in downpours, and invocations offered for the company and the shareholders in attendance. It meant ownership, participation and the sense that you were a part of a shared endeavor.
Enter shareholder activism
Corporations were created as a vehicle for groups of individuals to put their money together and work toward a common goal. This money, once invested in the corporation, is represented by share in the corporation. Shareholders have governance rights, most importantly the right to elect the board of directors. The board is charged with looking out for the shareholders’ best interests, and has responsibility for overseeing management who runs the company’s day-to-day affairs. This description was as true in the nineteenth century as it is today, well into the twenty-first.
Shareholders are owners. As owners, they have the right to participate in the system of corporate democracy that is enshrined in our laws, enforced by our courts and supported by our taxes. This fascinating mix of direct and representative democracy is a two-way street that depends on engaged shareholders and receptive companies to function properly.
Shareholder engagement waxed and waned over the course of the twentieth century. Berkshire Hathaway and Wal-Mart have made it a point to continue the tradition of participation once carried on by corporations like the Boston & Albany Railroad. Other corporations haven’t been less interested in what their shareholders have to say.
Along the way, there have been a few historical trends worth mentioning. In 1942, the Securities and Exchange Commission ruled that shareholders could submit proposals for inclusion on corporate ballots which gave a big boost to what we call “shareholder activism.” For the first time, shareholders were given the right to present their ideas about the company to other shareholders using the same platform as the company itself. This began a wave of shareholder resolutions aimed at improving corporate governance, changing corporate social values and behavior and, of course, increasing financial performance.
Shareholder activism during this time was largely dominated by individual investors. For example, at the 1964 meeting of General Motors’ shareholders, which saw 5,739 shareholders in attendance, a stockholder by the name of Mary Gay Harm rose to speak on the issue of apartheid in South Africa and discriminatory practices within GM itself, garnering a response from the board to the overflow crowd.
Things really began to change in the 1980s. A massive shift in the composition of the shareholder base began to occur as large institutions like pension funds and mutual funds began to make up an increasingly large percentage of shareholders.
The numbers are startling. Institutional investors held only about 10 percent of US equities in 1953, but their ownership has climbed to over 65 percent today. This concentration of the shareholder base has radically changed the way corporations interact with their owners. Engaged institutional investors receive the bulk of most companies’ outreach efforts, while retail shareholders are expensive to engage and generally don’t vote their shares. A concentrated institutional shareholder base only exacerbates the doubt smaller shareholders may have about the power of their vote, despite being important and necessary participants -- especially at a time when shareholder power is concentrating in fewer hands.
These large institutional investors engage with the companies they own whenever they want about the issues that matter most to them, something that is out of the reach of most everyday shareholders and half of investing.
Take back your power as an investor.
We know the technology exists to empower and connect voters and revolutionize proxy voting. Technology has made it easy to people to connect across all institutions, and now it exists to connect voters. The traditional proxy system is lonely, isolated and non-transparent -- but it doesn’t have to be. It’s time that shareholders use products that empower let them use their voices, rather than stifle them. Everyone should have a say on their wealth. It’s time to use this technology to take back what’s ours.