Ethical investing is a broad topic that touches on several areas. Much of the attention seems to be on which types of companies that are okay to own.

Other topics that aren’t as regularly discussed, are what to do once you own a company, or whether you should bother to own shares of individual stocks or not. So this article focuses on shareholder voting rights.

Shareholder Voting Rights

Individual shareholders of companies get to vote on matters of the company, as the owners. The most important vote is to elect the board of directors, since they run the company on behalf of the shareholders. The next most important set of votes covers everything else. Companies must regularly allow shareholders to vote on certain things: they get a say on executive compensation, they get to accept or not accept the auditing company, and they get to argue for, and vote for or against, any shareholder proposals.

To form a shareholder proposal, a shareholder must own at least $2,000 worth of stock and will have to present the argument at the shareholder meeting. Fortunately, it’s a lot easier to just vote on shareholder proposals compared to the difficulty of proposing them: all you need to do is be an individual shareholder, and to receive your proxy materials that the company sends out each year. (The proxy form is usually sent out once per year, and can be sent out via email, which allows you to review the issue to be voted on, and then easily vote over the internet.)

Most shareholder proposals are non-binding. That means that even if most shareholders vote in favor of one, the board of directors is not obligated to follow the vote. However, their positions as board members are voted on by the shareholders, so you can imagine that if they don’t do what the majority of shareholders want, they risk losing their seats on the board. For that reason, all shareholder votes, although officially non-binding, can be indirectly binding.

A Corporate Example

Exxon Mobil is a good example to use regarding shareholder voting rights, due to how large, complex, and controversial some of the issues are. Back in 2011, the shareholders of the company had a whopping 12 things to vote on, and eight of them (items 5 through 12), were all shareholder proposals. (The previous 4 were related to director votes, executive compensation, and so forth).

The proposals were as follows:

5) For the chairman to be an independent member of the board (and therefore not the same person as the CEO).

6) For the company to provide a semi-annual report disclosing the sums of money that the company pays to influence legislation.

7) For the company to amend its written equal employment opportunity policy to explicitly prohibit discrimination based on sexual orientation and gender identity and to substantially implement the policy.

8) For the company to articulate its position on the human right to water.

9) For the board to prepare a report, at reasonable cost and omitting confidential information, discussing possible long term risks to the company due to environmental, social, and economic challenges associated with the oil sands.

10) For the board to prepare a report, at reasonable cost and omitting confidential information, summarizing potential environmental impacts of ExxonMobil’s fracturing operations, and the policy options for how the company can go above and beyond regulatory requirements to reduce or eliminate hazards to air, water, and soil from fracturing operations.

11) For the board to establish a committee of independent and company experts to make recommendations and report to shareholders on how the company can become the recognized industry leader in developing and making available environmentally sustainable energy.

12) For the board to adopt quantitative goals, based on current technologies, to reduce the greenhouse gas emissions from the company’s products and operations, and for the company to report to shareholders plans to achieve these goals.

For the sake of this article, I’m not concerned with what people should vote for or against. The focus is simply on how numerous and large some of the things at stake are, and all of this comes down to how the shareholders vote. The board of directors recommended against all of these proposals, and so the votes went to the shareholders, and less than 50% of them voted in favor of any of these proposals.

How Index Funds Vote

In reality, it’s not quite as simple as being a corporate democracy. For most people, their stock wealth is stored in mutual funds and index funds. There are numerous advantages to index funds, like how they are low maintenance, and how they instantly diversify your holdings. One disadvantage, however, is that investors in index funds give up their voting rights to the fund manager.

We can take Vanguard, the gold standard of index funds, as an example. To be clear, I respect Vanguard and use their indexed ETFs for asset diversification, so the next part is just the facts about how they vote their trillion+ dollar sum of value:

Vanguard votes in favor of executive compensation 98% of the time, elects directors 94% of the time, and abstains from shareholder proposals that have to do with amending corporate or social policy 94% of the time.

Vanguard has fiduciary duty to its shareholders, so they vote their shares based on specific standards and are completely transparent about every single vote. For example, in the case of the 2011 Exxon Mobil shareholder vote, Vanguard was one of the largest shareholders, and they voted against proposal #5, and abstained from all of the others.

Conclusion

In conclusion, the point is to be mindful of who gets control of the voting rights if you hold equities. Ethical or socially responsible investing covers a wide area, and much of the attention is on what types of companies to own. Another thing to focus on is how to own companies, and what to do if you own them.

For example, investors that owned index funds that follow the S&P 500 in 2011, owned shares of Exxon Mobil but abstained from most of these proposals if they invested with Vanguard or most other index providers. Individually, they may have been for or against any given proposal, but through index funds they would have abstained from most of them, which generally is the same as a vote against a proposal.

So a key thing to consider when investing is to decide who gets the voting rights. If you invest in index funds, then the fund manager gets the voting rights. If you invest in individual stocks, then you get to pick which companies to invest in, and then you get to choose how to vote your shares. There are some advantages and disadvantages to consider with each approach, and investors that are prudent about ethical or socially responsible investing should be conscious of who gets control of the shareholder votes when deciding where and how to invest.

So, what kinds of things do you take into account when deciding where to invest?

Guest Post Author Bio: This is a guest post by Matt Alden of Dividend Monk.