Rigging the Proxy Vote: How Formula Swapping Harms Shareowners

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American corporations employ a questionable governance practice that gives boards unfair power to disregard investor ESG concerns. The practice, known as “Formula Swapping”, has caused more than 100 proposals – that otherwise earned a 50 percent or greater majority – to go down in defeat.

Formula Swapping is where corporations use a favorable vote-counting formula for board elections, but a more onerous formula to count votes on shareholder proposals. This boosts (more heavily weights) management’s board vote while depressing the tally for shareholder items. The key is how ABSTAIN votes are treated.

Formula Swapping packs ABSTAIN votes into the formula for shareholder proposals. Irrespective of voter intent, Formula Swapping mathematically converts every abstention into an AGAINST vote, thus lowering the vote percentage cast in favor. These distorted figures become enshrined in company SEC filings and are often reported by the press.

How did we get here? Under Rule 14a-8, the SEC mandates use of a fairer “Simple Majority” standard (FOR divided by FOR + AGAINST) to determine a proposal’s resubmission eligibility; abstentions are barred from this SEC formula. Other than this, State law prevails and the SEC cannot direct how companies count votes. Historically, competition for corporate registrations led to a “race to the bottom” wherein states permitted inconsistent and discriminatory voting practices that disadvantage shareholders to this day.

For example: a Plum Creek Timber proposal on political spending disclosure garnered a Simple Majority vote of 56.2 percent (using the formula also employed for Plum Creek’s board election). However, the company engaged in Formula Swapping to apply a more stringent vote-counting formula to shareholder items, which caused the proposal to receive only 34.2 percent – a 22 percent lower outcome. The amount of distortion varies, vote to vote, but whenever abstentions are in the formula, shareholder votes are reduced.

A 2013 CalPERS study revealed that more than half of American companies practice Formula Swapping and routinely re-cast abstentions as AGAINST shareholder proposals.

In response, Newground Social Investment and Investor Voice initiated a pilot project to ask that companies adopt a fair, democratic, Simple Majority standard for shareholder items. The proposal has been presented to 20 S&P 500 companies, and 30 percent have have adopted the Simple Majority standard. Our able cohort of co-filers has included: Boston Common Asset Management, Calvert Investments, First Affirmative Financial Network, United Church Funds and Walden Asset Management.

In 2018, we have taken a strategic pause while academic partners analyze a sizable 14-year voting database, in preparation for scaling up the number of filings in 2019. For 2018, one vote-counting proposal will be considered at Amazon.com’s May AGM.

Every ESG issue, from climate change to worker safety, is being systematically harmed by Formula Swapping. Shareowners can improve governance by:

  1. Voting FOR the Amazon.com vote-counting proposal.
  2. Asking proxy reporting services ISS and Glass Lewis to recommend support FOR vote-counting proposals.
  3. Recognizing how companies count shareholder-sponsored items, and sharing the proxy text with Newground.
  4. Asking portfolio companies to adopt Simple Majority voting.
  5. Not ABSTAINING. Thwart potential Formula Swapping by voting FOR shareholder-sponsored proposals.


Bruce Herbert HS.jpg

Bruce Herbert

Chief Executive, Newground Social Investment