Want to be an activist investor? As a shareholder, start with proxy voting

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If you’re a shareholder, you can vote for change.

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Want to have a say in how a public company is managed? If you’re a shareholder, vote by proxy. Proxy voting is a key part of environmental, social, and governance (ESG) investing, and these shareholder votes are your chance to channel your inner “activist investor.”

ESG investors compel a company’s board of directors to change how the business is managed and operates by voting proxies. If you don’t vote, your broker may vote on your behalf at their discretion, which may not align with your views.

Publicly held companies typically host annual shareholder meetings, often in the spring. However, most shareholders are unlikely to be able to attend in person, which is why they use proxy voting. You can vote your proxy by mail or online. Ahead of the annual meeting, shareholders receive a proxy statement—a booklet that gives shareholders insight into a firm’s corporate governance.

If you’re a shareholder, you might receive the booklet in the mail, or you might receive a notice inviting you to visit a website to view the statement and proxy card.

The proxy statement includes information such as:

In addition to the proxy statement, a proxy card will be enclosed. This is the ballot. Proxy cards include:

Voting items include the names of people who are running for the board of directors and issues related to how the company is run. Such issues can be complex and may take time for shareholders to digest, so investors can turn to proxy advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis for analysis of the items up for votes. The firms also usually issue voting recommendations. As You Sow is a foundation that issues a proxy advisory on key environmental or social issues in proxy statements.

ESG investors look closely at how much executives are paid, how that compensation lines up with industry standards, corporate performance, and other factors, and will often vote no if they believe pay is excessive. Shareholder votes on executive compensation, or “say on pay,” are nonbinding, so even if shareholders reject a pay package, the board may still award it. But failed votes on pay packages are unusual, so even though the votes are nonbinding, they can influence a board’s decision.

Shareholder proposals are suggestions a shareholder or a group of shareholders present to a company in an effort to change its management or operations. These proposals can be voted on at special meetings, but are usually included in the company’s proxy statement and voted on at annual meetings.

Many shareholders who submit proposals do so on ESG and sustainability issues. For example, the Interfaith Center on Corporate Responsibility, a faith-based investor group, publishes a list of the shareholder resolutions it files for each calendar year.

Some typical ESG-related shareholder resolutions focus on:

Have a shareholder resolution you want to propose? You can do so if you have continuously held at least $2,000 in market value of a firm’s shares for three years by the time the proposal is submitted. You must hold those shares through the annual meeting. You can only file one resolution per company, per season.

Don’t expect overnight success; most shareholder resolutions fail to pass. That said, these things take time. A failed vote sometimes stirs debate among board members behind the scenes, and today’s failed vote may be among tomorrow’s best practices.

Unlike in the political voting booth—where it’s one person, one vote—in proxy voting, it’s one share, one vote. That means the people and institutions with the most shares get the most influence.

Larry Fink, CEO of BlackRock (BLK)—one of the world’s largest investment asset management firms—has been vocal about the firm’s views on climate change as a key factor in many companies’ long-term prospects. In BlackRock’s responsible investment guidelines, the firm explains what it looks for in companies’ disclosures about a host of sustainability topics.

Carl Icahn is a well-known, long-time activist investor who has issued letters to companies he owns to get them to change corporate behavior. For example, Icahn’s 2022 activism included proposals to shareholders of fast-food giant McDonald’s (MCD) and grocery store chain Kroger (KR) to change how they treat animals and to improve the welfare of their employees, specifically when it comes to the pay gap between CEOs and average employees.

Icahn lost the proxy vote at McDonald’s and withdrew his proposal with Kroger; however, he claims his campaigns with the two firms had indirect influences, citing animal welfare changes at companies including General Mills (GIS) and Conagra Brands (CAG).

Sometimes shareholder proposals do win, and win big. Smaller groups can band together and vote their proxies toward one shareholder proposal. An example of a big upset was when small ESG-focused hedge fund Engine No. 1, which owned a minimal amount of shares in oil giant ExxonMobil (XOM), placed three climate-focused independent directors on Exxon’s board in 2021. It took convincing several groups, including BlackRock and Vanguard, to vote their proxies in favor of Engine No. 1’s favored board members.

If you own mutual funds or exchange-traded funds where you cannot vote proxies directly, you can find out how a fund’s proxies will be voted on your behalf. Sometimes this takes some detective work; it’s often buried in a fund’s statement of additional information, where it discloses the policies and procedures used to determine votes.

You can also find out how a given fund voted in its Form N-PX, which is due to the U.S. Securities and Exchange Commission (SEC) annually by August 31. In November 2022, the SEC adopted rules to make this information easier to read and analyze, including disclosures related to executive pay. The ruling goes into effect in July 2024.

There is some movement toward allowing smaller investors who own funds to start voting on proxies. Vanguard, BlackRock, Charles Schwab (SCHW), and other asset managers have started pilot programs allowing retail investors to vote on limited issues for a select number of funds.

As a shareholder, if you care about certain issues, you get a say in how a company is managed and insight into a firm’s corporate governance policies. You can also review other shareholders’ proposals to learn how they think things could be done better.

Proxy voting is your chance to let a company know your priorities. Limiting your investment choices isn’t the only way to make a difference; you can vote your shares to try to bring about change.