Institutional Investors Outsource Proxy Voting
Wednesday, October 14, 2020
If you are an institutional investor, you have probably thought about it, indeed there is a very good chance you are already outsourcing proxy voting. Either way it’s worth looking at the cost and benefits of why outsourcing makes so much sense for this key compliance issue as well as how much you should expect to pay and how much time you can save by doing it.
The obvious reasons most institutions outsource proxy voting are cost and risk. By cost we mean opportunity cost – all those hours spent on something you are not an expert in, namely corporate governance, add up. If you do not spend the hours or are not the expert you thought you were, then the compliance and reputational risk are always there to get you – hopefully just in the wallet.
Let us assume that you only spend two hours per company or 100 hours total on proxy voting for about 50 companies. Let us further assume the high-level personnel needed to adequately fulfill this function have an opportunity cost to your firm of $1,000/hour. You just cost your firm $100,000 in opportunity cost – assuming there are no glaring errors like voting tens of millions in compensation for CEOs that lost money for shareholders, or worse, a compliance failure.
What would it cost to outsource those same 50 votes? Well, with special meetings, 50 companies would result in closer to 55 to 65 meetings (so the cost above would be even higher than stated), but for coverage of 50 U.S. public firms using our “standard guideline” the list price for voting, analysis and support is typically about $2,500 annually. You are still going to want to spend a few minutes reviewing each report, as suggested by the regulators, as well as audit several of the reports each Summer. This also does not account for the impact on your staff; as someone who has been doing this for 25 years, I can tell you that proxies are boring – until they are not, of course.
Does it ever make sense to go it alone? Maybe if you are one of the largest institutional investors and you can influence management with your vote. Maybe you can get them to add a few of your funds to the 401K choice list or better yet have you managed their company’s 401K.
Granted this is not supposed to happen because it would be a conflict of interest, but it is one of the few explanations that make sense for why some very large firms have in-house proxy research at the cost of several million dollars versus the $40 to $50,000 that it might cost them to have voting outsourced using a standard guideline and assuming they have ten to fifteen thousand public companies in their holdings.
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