Starting in the 1930s with the earliest version of its proxy rules, the Securities and Exchange Commission gradually increased the proportion of instructed votes on a shareholder’s proxy card until, for the first time in 2022, it required a fully-instructed proxy card — the universal proxy. This evolution shifted the exercise of the shareholder’s vote from the shareholders’ meeting to the vote delegation that occurs when the shareholder completes the proxy card. In corporate elections today, the voting choice is executed when the binding instruction is made on the proxy card; proxyholders merely transmit the shareholder’s instructions as a formality.

In a new essay, I argue that the SEC’s move to a fully-instructed proxy card is more significant than generally recognized. It has restored the potential for deliberative shareholder governance to the large, publicly-held corporation. The fully-instructed proxy is the realization of the New Deal project to make satisfying shareholder preferences the crux of the shareholder franchise, and it holds real promise for moving corporate governance beyond shareholder wealth maximization.

Delegated Voting and Shareholders’ Pre-existing Interests

Political theory has given us two visions of electoral politics. One views the purpose of politics as “the aggregation of individual or group preferences to enable voters either to obtain certain benefits from the government or to prevent the government from depriving them of pre-existing rights or entitlements.”[1] This position emphasizes the pre-existing nature of voters’ interests and assumes that voters will use the electoral process to advance those interests. In this view, elections constitute the sorting mechanism through which voters’ pre-existing interests are expressed and given effect through governance.

The other theory views politics as primarily about collective deliberation and decision-making. From this viewpoint, “politics is as much about creating preferences as it is about satisfying them.”[2]

Applied to corporate governance, the first view would suggest that the purpose of shareholder voting is to aggregate pre-existing shareholder interests. The second view would suggest that the purpose of corporate elections is broader; it provides shareholders with a means to form preferences about corporate policy and to pursue them.

In politics, theorists debate the relative merits of these two approaches to electoral governance. In corporate governance, however, there is no such debate. The battle between these two theories was decided in corporate law years ago with the creation of the proxy system. Proxy voting is delegated voting — and delegated voting forecloses deliberation.

For public companies in the U.S., the shareholder vote has long been reduced to a single decision. The typical director election presents shareholders with a single slate of candidates running unopposed. In most cases, there is only one proxy solicitation, made by the corporation’s management. The shareholder franchise amounts to a binary choice: Delegate your vote or forego voting altogether.

Because the shareholder’s decision about whether to delegate the vote can only be based on pre-existing interests — no deliberative processes occur before the shareholder meeting itself — shareholder voting is about shareholders’ pre-existing interests. And shareholders all share a common interest in wealth maximization. Though some shareholders get more out of a high stock price (i.e., those holding more stock), virtually all shareholders benefit from a high stock price.

Initially, New Deal securities regulation reduced proxy solicitation to an exercise of disclosure. Federal regulations required the proxy solicitor to disclose how he or she planned to vote; the shareholder who signed the proxy card acquiesced to those choices. At a shareholders’ meeting, proxyholders merely exercised the votes in the manner in which they had disclosed they would in the proxy statement published weeks earlier — and the proxyholders’ votes could not diverge, because this would render the proxy statement materially misleading.

Although shareholder meetings were still held — and although thousands of shareholders sometimes attended — any deliberation at the meeting was irrelevant to the outcome of the election.

The Evolution to the Universal Proxy

In 1938, the SEC first required proxy solicitors to invite a binding instruction from the proxy-giver. The rule mandated that a party soliciting a proxy provide a means “whereby the person solicited is afforded an opportunity to specify, in a space provided in the form of proxy or otherwise, the action which such person desires to be taken pursuant to the proxy on each matter, or each group of related matters as a whole, described in the proxy statement as intended to be acted upon, other than the election of directors or other officials.” Within a few years the SEC had revised the wording to read:

Means shall be provided in the form of proxy whereby the person solicited is afforded an opportunity to specify by ballot a choice between approval or disapproval of each matter, or each group of related matters as a whole, which is intended to be acted upon pursuant to the proxy and the authority conferred as to each such matter or group of matters shall be limited to voting in accordance with the specifications so made.

The SEC’s use of the word “ballot” in this sentence was new and underscored the agency’s view of the delegation as the point of exercise of the franchise.

In 1947, the wording of the rule was changed to clarify that it did not apply to “elections to office,” meaning that a “two-way proxy” was not required for director nominees. “Two-way proxy” referred to a form of proxy that provided a line-item, up-or-down choice to the proxy-giver; the term has disappeared from our lexicon, but was used by securities law experts like Louis Loss as late as the 1960s.

By empowering the shareholder to make the electoral choice, and by obligating the proxyholder to execute that choice, the SEC had begun restoring to shareholders the ability to engage in deliberative governance. This process was finally completed in 2022, when the SEC’s new universal proxy went into effect, transforming the proxy card into something that resembles a political ballot.

This evolution from 1938 to 2022 reflects a serious, decades-long, expanding federal commitment to shareholder preference-satisfaction beyond the simple metric of shareholder wealth maximization. It must be understood as the realization of a federal commitment to shareholder preference-satisfaction that originated with the New Deal. Leaders of the SEC in the 1930s like William O. Douglas, spoke of the need to find “[n]ew tools to express and serve the investors’ interests” in pursuit of “democracy in industry and finance.” Indeed, the SEC’s creation of the Shareholder Proposal Rule (informally in 1938 and formally in 1942) facilitated shareholder-driven deliberation about corporate policies, on shareholders’ own terms.

The evolution also inspired and provided a basis for the “stewardship” movement, in which institutional investors came to view themselves as playing a key role in corporate governance. As more items have required instruction options on the proxy card, institutional investors have gained low-cost ways to express preferences beyond mere wealth maximization. The culture of corporate governance was changing to accept and even encourage institutional investors’ exercise of voting choice.

The SEC’s commitment to shareholder preference-satisfaction, through improved (and technologically enhanced) electoral procedures, has helped to move corporate governance beyond the simple metric of shareholder wealth maximization. It is no longer necessary for shareholders to reduce their interests to the lowest common denominator of wealth satisfaction when deciding whether to sign the management proxy or not. Shareholders can sign the management proxy while exercising full choice as to all options.

Perhaps most importantly, by shifting the exercise of the shareholder franchise from the meeting to the proxy solicitation itself, the fully-instructed proxy card has opened up new opportunities— — heretofore foreclosed— — for deliberative shareholder governance at the point of solicitation. The markets are just starting to awaken to this opportunity.

The next major frontier in corporate elections will focus on deliberative governance so that shareholders can make the most of their choices. The new deliberative governance will be tech-enabled and information-rich. Asset managers will take the lead deploying the new technologies by organizing clients, communicating with them around corporate policy, and creating infrastructure for them to make choices. This all suggests that we have moved from a regime that is rigidly devoted to shareholder wealth maximization to one that allows shareholders to develop more nuanced preferences. The fully-instructed proxy may yet reshape fundamental aspects of corporate governance.

ENDNOTES

[1] Samuel Issacharoff & Pamela Karlan, The Hydraulics of Campaign Finance Reform, 77 Tex. L. Rev. 1705, 1723 (1999).

[2] Id. at 1724.

This post comes to us from Sarah C. Haan, a professor at Washington and Lee Unversity School of Law and a visiting professor at the University of Virginia Law School. It is based on her recent essay, “Delegated Corporate Voting and the Deliberatie Franchise,” part of the Berle Symposium, Developing a 21^st Century Corporate Governance Model, (Berle XIV), and available here.