Ep. 253: Jonathan Smalley - Proxy Voting Makeover: Shaking Things Up with Digital Transformation

February 26, 2024 | 30 Minutes

Welcome to the Count Me In Podcast, where we bring you conversations with top industry professionals and thought leaders. In this episode, host Adam Larson sits down with Jonathan Smalley, Co-Founder at Proxymity, for a deep dive into shareholder engagement in the corporate world. They discuss the critical importance of strengthening shareholder engagement, the impact on investor relations, and the ongoing digital transformation of proxy voting. If you want to gain insider insights and valuable advice from industry experts, you've come to the right place. Tune in to hear their engaging discussion on the future of shareholder communication and the evolving landscape of corporate governance.

Episode Transcript:
< Intro >
Adam:            Welcome to Count Me In. I'm your host, Adam Larson, and in today's episode, we're diving into the world of shareholder engagement with Jonathan Smalley, co-founder at Proximity. We'll uncover why strengthening shareholder engagement is more crucial than ever, and why it's imperative for navigating the upcoming political landscape. From climate change to the rising influence of retail shareholders.
We'll explore the global factors impacting shareholder engagement, and the shift towards digitalizing proxy voting. Jonathan shares valuable insights on bridging the gap in shareholder communication, and the potential benefits for organizations. Get ready to gain a deeper understanding of the challenges and opportunities, in shareholder engagement.
< Music >
Adam:            Well, Jonathan, I'm really excited to have you on the podcast today. And we're going to be talking about shareholder engagement, which is something not everybody touches, necessarily, but it's a very important part of your organization. Especially if you have a board or shareholders, if you're a public company.
And, so, what makes strengthening shareholder engagement more critical, now than ever, for smoother investor relations. Especially as we're going into 2024 here, as we're recording at the end of 2023. What makes that so important, right now?
Jonathan:       Firstly, thanks for having me, Adam. Yes, I'd say it's more critical than ever, but I'd say it's been critical for quite a long time. But when we look at what's behind us and what's ahead, there are some really big global factors that are not going away. That are continuing to heat things up, I feel like.
I think as we head into 2024, also, it's the biggest political election year, globally, ever. Big elections in the U.S., India, South Korea, Mexico, likely to be one in the United Kingdom. And a lot of the factors, actually, that are going to impact political elections are going to be considerations when people go to the ballot box, are actually also transferable to the boardroom, or to the annual general meeting hall.
Things like climate change is not going to surprise people, but that is something that is extremely topical and is a key part of issuer-shareholder engagement. Just this year, both inside the U.S. and outside, more shareholders' climate proposals than last year.
And there are groups that cite that as financially material to their investment decisions now. And not just people on the street, but powerful, influential, institutional investor groups have got together and made that determination. And they're not just asking issuers and, obviously, the regulators are also calling for disclosures. It's also their service providers that are asking to do more.
They want net zero policies. They want better climate integration into things like voting policies. And another one that's been heating things up for a long time now is Say-on-Pay. 94% now of S&P 1500 companies have a say on pay vote every single year. Ten years ago that would have been about 50%, so it's a big increase. And, I think, this year they, against recommendations from the leading two vote, advisors went down, but less against recommendations. But those resolutions got less support this year than last year.
So that makes those contests quite frequent. And, then, I think, kind of linked to the climate change thing. You've got ESG versus increasing anti ESG, pretty polarized, and I think that's also something. As I sort of mentioned before, is going to also play out in political elections as well, not just in company elections. 
And then I'd say that the big kicker to all of that is that we're just seeing year on year more votes, particularly, more votes from retail shareholders. Institutional shareholder voting has been quite high for a number of years now because of active ownership, because of stewardship codes, because of regulation.
Retail, as a rule of thumb, has always been 20, 25% maybe in a contest a little bit higher than that. So there's clearly much more room for that to go into. And we've got some brokers going, "We're getting 30% a year on year increase." Some retail shared voting, and that's coming at a time where we're going through millennials and Gen Z's inheriting anywhere between $68 to $84 billion. And millennials, at the moment, are the most likely generational group to vote.
So big issues against the backdrop of a great wealth transfer heading into a year that is going to be, probably, more politically charged than any we've seen across all the democratic countries, in the world, that are going to go to the polls. So I think engaging shareholders and having an efficient way for companies and shareholders to communicate back and forth is going to be more important than ever before, just because there's so much more coming. And I think we'll get on to maybe the technology a little bit later.
But if you look at the legacy ecosystem about the way companies and shareholders communicate, we urgently need to upgrade that to deal with this. Because it's a good thing for companies and shareholders to communicate back and forth. We should be allowing it efficiently and digitally. And if we don't, and we're not ready for what's coming, then, there's going to be more negative headlines, I think, for companies to be worried about. As those general meetings debate and have voted on very important decisions for the company.
Adam:            Yes, it's great how you outline all the different political factors. All the things happening around the world, that are causing more and more shareholders to become more engaged. And before we get to the technology piece, maybe, you could elaborate a little more about the importance of that communication between shareholders, in the organization. How it can impact a company's overall performance and even reputation?
Jonathan:       Yes, I mean, starting with the reputational piece, it's probably easier to talk about the downside, sometimes, because, then, that's the thing that creates headlines. It creates headlines when results are challenged. When there's uncertainty about the results. And we saw a fairly infamous case a few years ago at the P&G's meeting, votes counted three times and it was a different result every time. And you're like, "How could that be?"
And that was very expensive, both for the company, it was an activist situation. It was expensive anyway for the campaign, as well as casting doubt on the whole underlying result. But we also see that where it's maybe not just a mistake, but it's the fact that the issuer has got something wrong.
I mean, the one that comes up in the UK, has come up several times, is Sports Direct. Which is the UK equivalent to Dick's Sporting Goods. It's a household name. It's a consumer business. But there've been in the headlines for all sorts of the wrong reasons. Revolt against the CEO and the principal owner. Couldn't appoint an auditor for a period of time.
So I think that having good shareholder engagement can in many ways keep companies out of the headlines. I think, going back to the question, though, how can it positively impact a company's performance and reputation?
I think it's important to have a loyal base of shareholders. I think that's, especially, true for consumer businesses, that can be a big plus. And I think how many people have invested in crowdfunding scenario, where they're also using that product or service, and that actually seeps into other areas.
You can easily see somebody holding a stock in their brokerage account because they like the products or services they're consuming. And loyal shareholders, generally, mean you've got a resilient base. In the prosperous times, you could take that for granted.
But when we go through other parts of the economic cycle, having a loyal shareholder base is something that can help make the underlying share price resilient. And that's both true in terms of retail shareholders and institutional investors.
A lot of the institutional investors are extremely engaged, extremely active owners, doing thousands of engagements a year. And more likely to make a positive determination, on companies that engage shareholders regularly and in meaningful ways. And in terms of tracking that to performance, it's been proven by lots of studies, about how the importance of an outside perspective of active owners, particularly, active institutional investors, can be to helping the board and management deal with what I'd call moments that matter.
On any given year, what might be on the slate, for a general meeting, might be fairly boilerplate. But there will be those big moments that matter. Those big dilemmas, where it's important to have a way to very efficiently engage your shareholder base so that you can get the right outcome for the company.
And, so, I think all those three things go together. It's hard to make an argument that not engaging your shareholders and having that easy way to access them, is ever going to be a bad thing.
Adam:            Mh-hmm. Well, and I imagine with the shifting of the wealth, as you mentioned. It's no longer just a bunch of very high wealthy people making their voices heard because they're a shareholder and they may have more shares than others. But because so many people in the launch of many different apps, and it's like the common person is having that access to those shares and being able to buy stock.
I think of organizations like, in the U.S., the Green Bay Packers, as a fan, you can go buy a share in the team and go to the share meeting at the stadium. So it's becoming more common for people. So when you have that open communication, it's going to be a double-edged sword. People will be excited about things, but then you'll also hear their voices when they're not happy about things. But it helps you grow as an organization, as well, I imagine.
Jonathan:       Yes, and I think the last thing any company or organization, for that matter, wants is for that dissent to play out publicly. In either a general meeting or in the result of a general meeting. It makes sense to have those conversations early. To have those conversations throughout the year. And I think as we look to digitize not just proxy voting, but investor relations, in general, it does open up the ability to not just have a once a year, en masse engagement with all your shareholders.
But to, actually, easily, engage the opinions and views of everybody, and that's just about risk management, if you like. Or, on the flip side, looking for where they might have input that you hadn't already thought about, outside perspectives. Everybody, I think, appreciates the power of diverse skills, diverse opinions. Well, there can be nothing more diverse than getting the opinion of all your shareholders. Whether it's the biggest, most powerful asset managers in the world, down to people with handfuls of stocks in their brokerage accounts or pension funds.
Adam:            Mh-hmm, yes, that makes a lot of sense. So you've been hinting at things like technology, and that there's huge gaps in how people communicate. I know when I get notices in the mail for voting for certain shares, I have in my 401K. It's this mailer, with this huge booklet, and you're like looking through, trying to figure out, "I don't even know what I'm looking at here."
So maybe we could talk a little bit about what are some of the huge gaps that are happening right now, that are hampering this engagement. Then we can get into talking about what are some solutions that people can have.
Jonathan:       Yes, sure, I mean, everybody knows the mail, the proxies in the mail. Almost everybody's got one of those things, and it's probably on the kitchen table somewhere. The way I think about the technology gaps is in two big buckets. Firstly, is structural, and then secondly is more the modalities.
By structural, and this is where we initially started out, several years ago, on the Proximity journey, was the way that shares are held through the ecosystem. It was not designed, it was not optimized, for communication. I mean, it probably wasn't even an afterthought. The way shares are held is all designed to make efficient things like settlement and the holding of securities. 
So I always describe it like looking at the layers of an onion. Right at the center, you've got the central securities depository. So in the U.S., the DTCC, but name any country around the world, it's a similar type organization. Who owns what at a central level, but only who owns what of the next layer in the onion. And then the next layer in the onion knows who the next set of intermediaries are. So between any issuer, at the center of the onion, and an investor, there can be six, seven, eight intermediaries or service providers.
Now, they're all adding value to each other, that's why it exists, but it's optimized for something else. It's not optimized for communication. And, then, when we go and try and lay on top of that, things like proxy voting or any form of investor communication, that's when we get problems.
Because they're all having to communicate through each other, and that means things like transmission of information is delayed, it can be distorted, it erodes decision time. And it, generally, makes the whole thing for the two-end users, the companies and the shareholders, less transparent than it should be.
So they're not communicating directly, they're having to communicate through this quite labyrinth-like ecosystem, that's the first problem. We can't do anything about it, our structure exists for very good reasons and very technical reasons, as well. As well as just reasons about trying to keep the marketplace efficient and cheap for people to hold and buy shares. But we can, with modern technology, do something to move ourselves out from having to navigate directly through it. 
The second big bucket is all about modalities, and there is like a weird and wonderful mix of the way proxies get voted throughout the world. You mentioned mail, but I think it would surprise people that at some point in a vote's journey, from a shareholder to issuer, it's almost certainly being put on a spreadsheet and attached in an email, and sent from one party to another.
Now, you might think there's nothing particularly wrong with that. But when you're doing it at scale, and when you think how important that vote might be. To the outcome of a meeting for one of the biggest companies in the world, or even a small, medium-sized company that's contributing meaningfully to the economy, in which that company exists.
You can easily appreciate, why they have as a margin for error there, and that margin for error means some votes are not getting counted, or some votes are just being cast the wrong way, and that distortion shouldn't happen, it's inefficient.
You could take it to extremes, I remember doing a project, many years ago, in an Eastern European country, and the dominant way shares got voted was through a paddle board. So you would have people have to attend the meeting physically. They'd have to pre-register a number of shares, and they would see the paddle board with a number on. And when the chair of the meeting would call out the resolution, they would raise the paddle for or against.
And to prepare for the meeting, they would have to take all the votes from all of their underlying clients, whether that be intermediary clients or, ultimately, directly from some investors. They would have to put those votes into unique sequences. And then if they had ten unique sequences across the meeting, they'd have to send five people because one person can only hold two paddle boards at any one moment in time.
Adam:            Wow.
Jonathan:       And this wasn't even that long ago. Now, that's, obviously, an extreme example. But all those modalities create this very complex ecosystem, that it's hard to get shares voted, and we're talking Excel, we're talking mail. In some very developed markets, we're still talking about some voting instructions going over fax machines, we're talking about physical attendance, powers of attorney.
So if you then take the structure and the fact that we're using so many legacy communication tools. There's a reason why investors are not having to vote many days before the real deadline. There's a reason why it's very hard for investors to work out— "Did the vote get to where it should have got to, and get counted." And there's a reason why issuers are going, "Where are the votes?" Until the very last minute because there's so much friction in that ecosystem, so many different people involved.
And, so, many different communication modalities or methods it takes a while to get that information to them. So they're the big gaps. And I think to layer on top of that, like I said, every country is slightly different. And it's also that nuance that makes it fairly difficult, then, to make meaningful progress quickly. 
But I'm a big believer that lots can be done, and I think we've seen lots of progress over the last few years. And, certainly, that's Proximity's mission is people shouldn't have to worry about this stuff. We should be optimizing the experience for companies and shareholders. And we should be doing a better job, as an industry, about making their experience tangibly and meaningfully better.
Adam:            Yes, I mean, if we can make affordable glass phones, like that Samsung phone, if we can make those things, we should be able to make shareholder relations and proxy voting so much simpler than it is. And, so, maybe you can talk a little bit about that digital transformation for proxy voting, and maybe a little bit of what you guys are doing to help bridge that gap, that you just went over. Because I think that's important to understand; how can that gap be bridged and what people can do to take the next step?
Jonathan:       Yes, absolutely, and, I think, just remarking on the experience for a retail institutional investor. I think to link it to our earlier discussion, about how to engage retail shareholders more meaningfully. Often historically we've given retail shareholders the same tools that institutions have had, and there are institutional investors that are professional, and resourced, and have corporate governance professionals, and lawyers look over this stuff.
You and I don't have those resources, nor do we have that time. So giving me a proxy in the mail, is not going to get me to participate in the same way or to the same level as the institutional investor community does. So it's all about also thinking about how do we adapt the experience. In terms of how can we improve things and how have we improved things, for us, it's been, firstly, about kind of reimagine the process and turn it around.
So what was happening? Companies would decide what the general meeting agenda was going to be. They'd send that to their service provider of choice. Who'd then send that on to the first layer of banks. Who'd send it onto the next layer of banks. Who'd send it, ultimately, find its way to the investor. And then the investor would vote, and it would have to go back through the layers, all the way to the issuer.
What we said is let's take out the layers, as the first step. Let's take the data we need from those financial intermediaries, that we all hold our shares through, and all institutional investors hold their investments through, and figure out the pathway between an issuer and an investor.
So that as soon as we handle the information, it's going all the way to the shareholder straight away, with their confirmed reconciled voting amount. We're not having to work that out after the fact. And there's a split between some markets, whereby your right to vote was crystallized before you got the proxy. And there's some markets in the world, where actually you get the votable agenda before your entitlement is determined.
So our solution is compatible with both. That means we can get the information to the shareholder much faster. So straight away we give them extra decision time. And because we're taking the information, the meeting information, directly from the company or from their agent, we're not relying on third party data vendors. And we did a survey this year, 25% to 33% of investors were saying that the meeting agenda they, ultimately, got was either distorted or missed data, and the most common reason was the detail was stripped away.
So it was very hard for me to figure out, ultimately, was I voting on the right thing? I was missing the information I needed to make a decision. So our approach means get the information faster. We give them golden source data that nobody else needs to touch. That means they can then vote back much sooner. And because when they vote back, we can give that directly to the issuer because we've created that digital ownership pathway, we don't have to send the vote back through any other layers in the system.
So the issuer, actually, now has the potential to get the vote much earlier than they historically would have got it. And, therefore, if that doesn't match what they're expecting, or their engagement that they'd had prior, or their investor relations communications, there's more time to do something about it.
There's more time to have another engagement, another conversation. Which, in our opinion, can only be positive. And a final benefit of that is because we've simplified the process, the companies can confirm, for the first time, to the shareholders that we got the vote. The vote got counted. The vote is going to be confirmed in the meeting.
That missing feedback is an inherent pain point inefficiency of the old way of doing it. Because it was so hard to communicate through the layers and through so many different methods, it was impossible to finally confirm back the vote got counted. And the results are important, kind of, what were the results?
I mean, when we did the very first Minimum Viable Product of Proximity, many years ago, we were able to give nine extra days decision time. And the typical calendar for a general meeting is about a calendar month, maybe, maximum, two calendar months, it depends on the market, it depends on the company, so nine days is very meaningful.
For an institutional investor, they need to get the meeting information confirmed before they go off and do the research and decide how to vote. Many of them have levels of automation around that, but many of them also have the automation and have a very diligent review process. "How are we going to vote at this company, that we have a very sizable, meaningful investment?" It's a serious business for them. Give them nine extra days, they can do a more thorough job.
And for retail investors like you and I, I don't have a ton of time to vote my proxies. But if you can give me more time, it's surely only going to be helpful to drive my participation up, as well as if you can give me a better experience, as well, a more tailor-made kind of retail experience. And it's not just shareholders that stand to gain, as mentioned, for issuers, they don't have to wait until the very last minute to get the votes, and that's a kind of inherent inefficiency of the current system.
They can get the votes as soon as they're cast. They can see, is that going to meet quorum? They can see if that matches their ROI conversations or their engagements, and they can see if it spells trouble, so they've got time to do something about it.
And trouble is, "Well, my shareholders don't agree with the decisions we're making, so I might need to go and speak to them." And, again, I think that can only be a good thing. So really simplifying the process, at its core, and optimizing the experience just has benefits for everybody, and that's kind of speaks to our mission.
Adam:            Yes, it allows for more time to make better decisions because if you get something in the last moment because of delays, or the mailers, or whatever, you don't have as much time to make a more informed decision.
So you're allowing to make better and informed decisions, which, in essence, helps the organization, in the long run, because you can vote with a more informed decision. So have you seen, in your research, as you've worked with organizations, is there a direct correlation between good shareholder relations and the company's financial performance or market perception? Is there a direct correlation between those things? 
Jonathan:       Yes, for Proximity, it's probably too early. So we've been in business for three and a half years now, progressively scaled up during that time. We have, in some markets, now, 70% of institutional votes coming through our platform, so I think now we have that data about levels of engagement, levels of voting. You can then start to track that against financial performance.
But, obviously, there are many different elements that go into shareholder engagement over and above proxy, and obviously, many different things that can happen to a company's financial performance.
So it does take a careful data analysis for us to do. I think the most comprehensive study I've read was one by one of the big consultancy firms, I think it was Deloitte. I think it was kind of a study of studies, and they looked at 60 odd studies and 120 relationships directly, and their conclusion was fairly unanimous. That good shareholder engagement, and good governance, particularly variables like board independence, board diversity, oversight, the ownership structure.
When those things were good, those companies performed good, both financially and non-financially. I think most people can understand how having active institutional investors, giving outside perspectives, is going to be good for a company. How having a board that's independent and diverse, with diverse skills and backgrounds is going to be good, and how having a remuneration policy that rewards management and rewards the CEO, when the company does well, but also thinks about how to incentivize in the harder times, as well.
One of the things is when we go through a different economic cycle, giving management stock options all the time is, obviously, not going to incentivize them because sometimes there's just nothing they can do. So I think levels of engagement and good governance, that comprehensive study was, overwhelmingly, tied, strongly, to financial and non-financial performance. Isolating that specifically for; how many people voted at my general meeting? How engaged my retail shareholders are? I think it's too early to say.
But as we get data and easier access to the data, as we get rid of some of those legacy communication modalities, where it's very hard to then sort through all that data. If actually shares were voted and tabulated from 12 different methods, I think it will be easier to answer your question more decisively. But I think that the underlying factors speak for themselves, in terms of should a company do it or not?
Adam:            As we go into an increasingly technological world, we're becoming more and more reliant on it. Have there been concerns about security, when it comes to proxy voting in this manner that you've been discussing? Obviously, when they're doing the mailers, they don't know that it's getting to the right place, they don't know who's sending it back. There probably wasn't very much security in the old way of doing it either. But have there been concerns brought up about the security, when it comes to doing this type of process?
Jonathan:       Our customers hold us to a very high bar in terms of due diligence in terms of information security because what we're dealing with is very important. But I think you kind of touched on some of the areas where, provided we're serious about what we do, and we take all the best practice around that, around subsequent information security. We hold ourselves to a high standard in terms of auditing, and whoever does it, whoever's, ultimately, digitizing proxy voting does the same. We're infinitely better off than the world that we've inherited.
People might think there's a natural resilience to paper, and Excel, and many different manual methods, but actually that's where you're more likely to have an error, or an issue,
or an oversight, or something that just doesn't get there. I think you have many more options when things are digitized on platforms, in databases that can be backed up, that can have several levels of resiliency to them, built in by design. But it's like any election, there is the potential for bad actors to become involved, as we've maybe seen in some of the political elections of years gone by.
Adam:            Mh-hmm, yes, that makes a lot of sense. I mean, as long as you're taking up to the highest standards, you do the best you can. Because if hackers are hackers, and there'll be always be hackers, but you do the best you can with security in the midst of all that.
Jonathan:       Yes, and I think for companies, as you would expect, the general meeting is a very important event, and it's a very, I'd say high-risk, event, in general, for most COSECs, and most investor relations professionals, for the CFO, for the directors, for the CEO, as you'd expect. So they take it seriously, we take it seriously, and I think the rest of the financial community takes this bit of the industry proxy voting very seriously.
But we're in an infinitely better place if we have things accurately, digitized in modern systems than we do by having it strewn across legacy methods. There will always be bad actors, our job is to be resilient against them.
Adam:            Yes, so as we wrap up the conversation, what's some advice you could give to companies that they should be doing now to prepare for future challenges? And if they're thinking about switching proxy voting to this type of platform that you've been discussing, like yours, what should they be looking for?
Jonathan:       Yes, I think the first piece of advice is that it's not a big switch that needs to be pressed. The ecosystem can still support all of the methods, today, there is just a new way to do this, and, over time, the old methods will slowly fade away, particularly things like mail, particularly things like fax, you're just going to see less of that. I think the other kind of what I would call like fake electronic will be kind of slower to hit the wayside.
But using a platform like Proximity is completely compatible with the old way of doing it as well. It's just that, over time, you're going to see more votes coming through a platform like ours than you do through some of the old methods, so it doesn't need to be that big move.
And kind of linked to my kind of prior comments, we understand it's a high risk event, so doing a big bang migration from one way of doing it, which, for all of its flaws, has worked in commerce for the past decades, to a completely new way is also probably not the right way for many companies.
So a simple adoption of a digital voting platform that can provide a highway through to your end investors can start as just a new channel. And then over the fullness of time can become the dominant channel, and that's what we're seeing in some of the markets that we're most progressed in.
As soon as we get over that 50% of share cap voted to our platform, that is a real tipping point for many issuers. So I think that's the first thing, is it doesn't need to be that big, scary, big bang migration, that almost everybody in the corporate world is slightly apprehensive of, for understandable reasons. It can just be about giving yourself additional optionality, which immediately brings benefits.
So I think that's the major thing to navigate through this, and to do that now, the big factors at the top of our conversation I think everyone can appreciate are not going away. So it's never been more important to engage with all the shareholders, from the biggest institutional investors, in your companies, right through to the retail shareholders that are showing more and more appetite for engagement than they ever have. 
Adam:            Well, Jonathan, thank you so much for coming on the podcast, today. I encourage our listeners to check out the links in the show notes, if you want to learn more about Proximity or connect with Jonathan. Thank so much for coming on.
Jonathan:       Thanks, Adam. Thanks for having me.
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