A proxy is a written delegation of authority to cast one's votes. This authority rests with the shareholder of a corporation

Question

Explain why the proxy process gives management, and not the shareholder, effective control over the election of the board of directors or over policy resolutions.

Answer 1

The proxy election is usually run by a proxy committee of corporate executives, who, under the Security and Exchange Commission's Proxy Rules, must use a ballot form to solicit proxies. The form must state that the shares held by the shareholder will be voted in accordance with the way the shareholder marks the ballot. The shareholder has the option to indicate on the ballot that he or she wishes to allow the proxy committee to vote the shares in any way it sees fit. The proxy committee also sends all shareholders a statement of resolutions on which the shareholders are to vote, as well as a biographical sketch of each of the candidates for the board of directors. This process sounds efficient, even benign. Because shareholders of major corporations, however, are scattered across the country and could not realistically attend a shareholders' meeting, the proxy process gives management effective control over the election. By placing on the ballot only the names of those candidates management wishes to see elected to the board of directors, management, in essence, selects the board. Although a shareholder can write in the name of another candidate, the cost of communicating with other shareholders makes the prospects for a write-in candidate quite slim. Any shareholder may also engage in proxy solicitation. The costs of doing so, however, are almost prohibitive. In a fight between a shareholder and the corporate proxy committee for proxies, the corporate committee has access to corporate funds; corporate office materials such as paper, duplicating machinery, and postage accounts; shareholder contact information; corporate clerical personnel; and also the corporate legal staff. The shareholders have only their personal funds. When these types of resolutions appear on proxy forms, the management of the corporation usually suggests that shareholders vote against them. Management also generally includes a strong argument against such resolutions on the proxy statement on which the proposal appears. Thus, even if a shareholder does get a resolution on the ballot, the chances of it passing are slim, though there are more frequent and more vigorous fights over policy resolutions than over the election of directors.