Confidential Voting

How Confidential Voting Works

Confidential voting, also known as voting by secret ballot, is one of the key structural issues in the proxy system. In a system of pure confidential voting, all proxies, ballots, and voting tabulations that identify individual shareholders are kept confidential. Only the vote tabulators and inspectors of election may examine individual proxies and ballots; management and shareholders are told only of vote totals.

Exceptions to Confidentiality

Exceptions to this confidentiality are normally made when a shareholder provides written comments on a proxy card, in which case most companies with confidential voting reserve the right to examine the proxy card. Exceptions are also often made during proxy contests (i.e., when there is a dissident proxy statement and card). In these cases, companies with confidential voting usually reserve the right to inspect individual proxy cards. The rationale given for such inspection is that, because of the high stakes and multiple mailings in a contested election, each side's solicitor must be able to determine who has voted in each successive round.

Advantages of Confidential Voting

The major advantage of confidential voting is the elimination of pressure on investors to vote with management in cases when management may determine how they voted. Shareholders who either presently maintain or would like to establish a business relationship with their company may be inclined to support management, even when it is not in the best interests of shareholders, solely to avoid possible repercussions. Maintaining the secrecy of vote results allows shareholders to pursue business and other relationships with the company in question independent of differing views regarding corporate governance issues. Thus, management is less able to entrench itself or reduce its accountability by exerting influence over company shareholders.

Arguments Against Confidential Voting

Critics of confidential voting, which often include management and proxy solicitors, argue that such a policy may result in some companies failing to reach a quorum count at their annual meetings, and therefore cause these companies to incur the expense of second meetings or votes. They say that one important function of a proxy solicitor is to ensure that all shares entitled to vote at each annual meeting are voted in a proper and timely manner, and that losing the right to inspect individual proxy cards in advance of a meeting could result in many cards being voted improperly (wrong signatures, for example) or not at all.

Critics also claim that confidential voting harms the shareholder/management communication process. For instance, street name and nominee registration and the practice of "piggybacking" make it more difficult for companies to identify their beneficial owners, which in turn significantly inhibits communication between management and shareholders.[1] In fact, many companies believe that financial intermediaries, such as custodian banks, already afford shareholders an adequate degree of privacy with respect to their votes. Adding a confidential voting requirement would only worsen the communication problem, without providing tangible benefits to shareholders, critics say.

Finally, opponents of confidential voting note the inherent conflict between voting in secrecy and client disclosure of proxy votes. It is thought that the best way to ensure accountability in the proxy voting system is to require all voting fiduciaries to make their proxy voting records available to all beneficial owners, pension fund participants, trust account beneficiaries, and others whose proxies are voted by an intermediary. Such a requirement would create an environment in which voting fiduciaries would be reluctant to cast any votes that were not in the best interests of beneficial owners.

Prevalence of Confidential Voting

Despite such criticisms, many companies are adopting confidential voting policies. Heading into the 1992 proxy season, for example, over 60 companies (most of which were located in the United States) planned to adopt confidential voting policies to protect the identities of shareholders.[2] A recent ISS database survey indicated that roughly 80 domestic companies practice confidential voting in some form.

Evaluating Confidential Voting

In general, the benefits of confidential voting outweigh the costs. The number of votes lost because of improperly voted proxies should be more than made up for by the additional votes cast because of the removal of corporate pressure to vote with management. As to the argument that it would only exacerbate the communication problem between management and shareholders, confidential voting would only eliminate management's ability to pinpoint individual anti-management votes: management could still contact all shareholders; shareholders' ability to communicate with management would not be affected by a secret ballot system. Finally, client disclosure requirements and secret voting are not mutually exclusive. In fact, the two should complement each other, as allowing shareholders to vote in secrecy and requiring institutional fiduciaries to disclose their votes after the fact would ensure that all voting decisions are based on the merits of a proposal and cast in the best interests of fiduciaries' clients and pension plan beneficiaries.

A pure system of confidential voting would provide dissident shareholders access to voting results and would facilitate their resolicitation efforts, but would prohibit management from acting likewise. Because shareholders benefit most when provided with all facts (and in a balanced fashion), it is imperative that both sides be given the same right to resolicit shareholders. If management is not permitted to see how shareholders have voted, then neither should the dissident group. Alternatively, if the dissident group is unwilling to comply with guidelines imposed by a confidential voting policy in the event of a proxy contest, management should likewise be able to waive such restrictions.