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What is Proxy Vote?
The concept of the proxy vote is an interesting one. When on behalf of a shareholder, a person casts a vote – it is called a proxy vote.
Here’s how Proxy vote works.
Whenever an important decision or two needs to be taken by a public company; a proxy ballot along with a booklet is being sent to every shareholder of the company via mail. The booklet is called proxy statement and it contains the information about the issues that the shareholders need to vote on.
The issues can be very critical to normal decisions. As for example, we can talk about –
- Getting the approval of the decision to merge or acquire,
- Electing the right board of directors,
- Getting the approval of a plan of stock compensation etc.
How proxy voting process works?
Knowing only about the proxy vote isn’t enough. It’s also important to find out how the process of proxy voting works. Let’s dive in.
- It all starts with an accountability of public traded companies to their shareholders. And the companies showcase their accountability by sharing information about their activities in annual meetings.
- During the meetings, these companies report the shareholders about the board of directions (or the changes made, if any), salaries of executives, issues related to expansion, merger, acquisition etc.
- Along with reporting the critical information of the organization, the companies also ask the shareholders to vote for whatever they think the right option.
- Before the annual meetings, the shareholders are sent the proxy statement stating the options to be voted on, the annual report, and a proxy card. This proxy card contains voting instructions.
- This arrangement is done because most shareholders/investors can’t arrive at the annual meeting to vote for/against the option. That’s why each shareholder chooses a person to vote as per the shareholder’s direction. This person can be anyone from the management team of the company.
- This proxy vote allows the shareholder to choose the right option – approving the auditor’s report, electing the right directors etc.
- The proxy votes should be cast on or before 24 hours from the annual meeting. This can be done via online, phone, or simply through the mail.
- There are usually four options that shareholders can choose while casting their proxy votes. They are “not voted”, “abstain”, “against”, and “for”.
Why do you need to know about the proxy vote?
source: Colgate SEC Filings
As shareholders of publicly traded companies, you should know what a proxy vote is and how it works. If you don’t know you would find difficulty in dealing with a situation where you would be asked to cast your proxy vote and you wouldn’t have any idea.
That’s why it is important for you to ask the company about how proxy vote works in their company while you purchase the shares. No matter from whom you buy the shares, you need to know your rights as shareholders and how you would be contacted in the case there’s a need of proxy voting.
Your broker or the company should inform you about the procedures of proxy voting and if not, you should definitely request for more information about it.
Majority Vote and Plurality Vote
Along with understanding proxy voting, you should also understand what majority vote and plurality vote are.
- When majority vote happens, the director who gets the majority vote wins. In this case, if you abstain from voting or withhold your vote, it may not affect the election or the director who is being elected. The proxy statement that you receive before the annual meeting should mention what will happen in the case of the abstained vote or withheld vote and how these will affect the results of the voting.
- On the other hand, plurality vote works in completely different manner. In this case, a candidate who would be the winner should get more vote than his/her competitor. That means if the winning candidate gets only one vote, he/she will win. If the shareholders don’t want to elect the winning candidate, they can simply withhold their votes. A large number of votes withheld may affect the decision-making ability of the board of directors. And in near future, they may become careful about choosing the right ones as directors of the board.
Conclusion – Proxy Vote
As shareholders, you have the power to vote, to choose the right from wrong, and to elect the right person to take things forward for the company. Understand your right and you would feel a sense of belongingness with the company.
This has been a guide to Proxy Vote, its meaning with practical examples. We also have a look at how proxy voting process works along with Majority vote and Plurality Vote. You may also have a look at these articles to learn more –