Let me start by noting that “transparency” isn’t the same thing as “proxy design.” It’s true that they’re related but it’s more accurate to say that proxy design is a part of transparency. Or that it’s subsumed by transparency.
There are four primary factors that have led to “proxy design” being a term that most of us recognize:
- Voting Becomes Important
The first factor is the rise – over a long period of time – of the importance of voting at annual shareholder meetings. This was kicked off by Bob Monks when he worked at the Department of Labor and he kicked off a policy initiative in the mid ‘80s that would ultimately result in pension fund trustees being under a legal onus to vote their shares. The DOL’s Interpretive Bulletin 94-2 issued in 1994 made it clearer that plan fiduciaries had an obligation to vote their proxies.
Monks ultimately left the DOL and founded Institutional Shareholder Services (aka “ISS”) in 1985, a proxy advisor which helps institutional investors decide how to vote the shares held in their portfolio.
At the same time that this was happening, the proportion of shares in U.S. public companies owned by institutional investors rose from 16% in 1965 to 47% in 1987 and again to 57% in 1994. According to this article, institutional investors today own 80% of all stock in the S&P 500.
Going back to the ‘90s, institutional investors now had clout and they had a regulatory obligation to vote. But it still took a decade or so before matters on the ballots of some companies became close enough that companies took a greater interest in soliciting votes. For a long time, management proposals easily garnered a lot of support without companies having to work to obtain shareholder approval.
2. Shareholder Proposal Support Grows
The second factor is the rise in the importance of shareholder proposals. Many more shareholder proposals pass these days compared to 20 years ago. Or have a voting outcome that induces companies to take some sort of action related to the proposal. Many more shareholder proposals are “negotiated out,” meaning that companies take an action that a proponent wants and the proposal is withdrawn before the annual meeting even occurs.
Interestingly, the number of shareholder proposals submitted to companies these days is not all that different compared to 20 years ago. As noted in this 1997 proposing release from the SEC, between 300 and 400 companies typically received a total of about 900 shareholder proposals each year back then. In 2022, as noted in this Gibson Dunn memo, the number of shareholder proposals submitted was 868. The numbers do go up and down each year, but the trendline is fairly flat overall.
What is different is the level of support that shareholder proposals receive. It used to be fairly rare for a shareholder proposal to garner majority support. And it took a new type of proposal quite a few years to gain steam as they typically grew support gradually over time. These days, a new type of proposal might earn majority support at some companies in its very first year of existence. The playing field has definitely changed.
Related to this is the interest in ESG topics by institutional investors. The Sarbanes-Oxley Act in 2002 made “corporate governance” a household name and led to an interest in shareholders submitting proposals on topics that sought to continue to push the envelope of governance. The past five years has seen a meteoric rise in the number of environmental and social proposals, along with a growth in voting support for those topics.
3. The Cost of Design Comes Down
The third factor is the ease of desktop publishing these days, something that allows so many to easily and cheaply have access to tools that allow for graphic design and other features that once was the province of professional publishers and designers.
Before desktop publishing, the cost of design was essentially prohibitive, particularly when the documents being drafted were considered to be primarily compliance-oriented in nature. There was no reason to spend the extra money that would have been spent for financial printers to go beyond the bare minimum when printing these documents on paper.
The move to online documents certainly has contributed to the willingness of companies to better design their proxy statement and for some companies, even their Form 10-K. And now ESG reports are the subject of design.
4. The Birth of the Disclosure Assistance Industry
The fourth factor is the rise of the disclosure assistance industry, a niche in which professional proxy designers assist their clients in enhancing the ability of the readers to comprehend what is being disclosed. Going beyond the types of services that law firms historically have provided.
The financial printers eventually got into this field. But it’s the boutique disclosure assistance firms like Labrador (and Argyle, which Labrador acquired a while back) that have truly pushed the envelope and helped so many companies get to where they’ve gotten so far…
