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THE WALL STREET
JOURNAL. |
Opinion
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Opinion
The Untapped
Power of Individual Investors
There
are more holders of ‘street shares’ than you think—with big
potential influence in companies.
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By
John Endean
Oct. 5, 2014 5:09
p.m. ET
Individual investors are
the Rodney Dangerfields of corporate governance. They “get no respect”
because the shares they own are thought to be too few compared with
institutional investors, and because they appear too unwilling to vote
in corporate elections to matter.
But what if there are three
times more individually owned shares than usually supposed? And what
if mechanisms were put in place to make it easier for individual
investors to vote in corporate elections? Since individual voters tend
to vote with management, these possibilities could have implications
for corporate governance.
The assumption that there
are comparatively few individual investors rests upon a misconception
that only 10% of so-called street shares of U.S. companies are held by
individuals while institutions hold 90%, as data from some popular
stock watch services such as Thompson Reuters imply.
When making this
calculation, the services assume that shares held in brokerage
accounts are institutionally owned because they classify
broker-dealers as institutions. That classification is logical—brokers
are holders of record, after all—but it’s also easily misconstrued.
A closer look reveals a
more accurate picture. The company that processes the bulk of
shareholder voting, Broadridge, regularly reports on trends in
institutional and individual ownership. Since the company is an agent
to most broker-dealers, it can analyze the accounts held by its
clients. U.S. companies are on average only 70% institutionally held,
with 30% held by individuals, according to a 2014 Proxy Pulse report
from Broadridge and PricewaterhouseCoopers. That ownership mix is much
different from what stock services typically report.
But even though the
universe of individual shareholders is three times as large as many
may assume, that means nothing if individual shareholders neglect to
vote in corporate elections. In 2014 only about 29% of shares held by
individuals were voted in corporate elections. Institutional investors
vote 90% of their shares, according to Proxy Pulse.
The low level of individual
voting has long worried the Securities and Exchange Commission, and
the protection of individual investors has been “a constant focus” for
the agency, as SEC Chairwoman
Mary Jo White said in a March speech. One way to protect
individual investors is to make it easier for them to vote.
To that end, the SEC in
2010 floated an idea called Advance Voting Instructions, or AVI, which
would allow individual investors to register voting preferences with
their brokers for every stock they own. These preferences might
include voting according to board recommendations, against board
recommendations or voting according to the recommendations of other
groups. Individuals would have access to their instructions for each
company vote and so votes could be easily changed.
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The concept is hardly
revolutionary. Institutional investors already enjoy the right to
register their standard voting instructions, and institutional voting
platforms commonly automate voting tasks. Moreover, with a few
keystrokes, some platforms enable institutions to vote all matters
based on the recommendations of proxy advisory firms. Yet a similar
option for individual investors like AVI has yet to emerge from
conceptual limbo.
Why? Well, no one expects
the institutions to champion AVI or any other reform to promote
individual voting. But it is striking that the CEOs and boards of
companies have not done much about it either.
Perhaps this will change
once the size of the individual-investor universe becomes clearer.
Even an incremental increase in individual voting, through something
like AVI, would have a real impact on, say, director voting or pay
issues. And it would be one corporate governance reform that CEOs and
their boards could justly champion as an expansion of corporate
democracy, leaving it to others to justify the suppression of the
individual vote.
Mr. Endean is president
of the American Business Conference, a Washington-based coalition of
midsize growth companies.
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