Inclusive Web3 Proxy Ballots: Democratizing Traditional Shareholder Voting

30 Oct 2023 9:00 By John Wooten

If you've ever owned shares in a corporation, you've likely been invited to have your say in important company decisions, from electing board members to approving mergers. While this sounds straightforward, the reality is far from it. ๐ŸŒ€


The traditional proxy voting system is a maze of paper ballots, phone calls, and centralized control numbers that can leave even the most diligent shareholder scratching their head. ๐Ÿค”


Why does this matter? Because shareholder voting isn't just a formality; it's a pivotal aspect of corporate governance that directly impacts your investment. The voting process gives you the power to influence management decisions, potentially boosting stock performance by tapping into the collective wisdom of a diverse investor baseBut what if this system, designed to give you a voice, is so flawed and cumbersome that it effectively silences you? ๐Ÿค


Deep challenges and inefficiencies plague the traditional proxy voting system. But what if there was a way to not only simplify this convoluted process but also make it more democratic? ๐Ÿ“ˆ

The Quagmire of Proxy Plumbing ๐Ÿ—ณ๏ธ๐Ÿ˜ต

"Proxy plumbing" may conjure images of a home improvement project, but it's actually a term that encapsulates the complex and often inefficient system of shareholder voting. It refers not only to the maze-like distribution of proxy materialsโ€”those vital documents that empower shareholders to vote on key corporate issuesโ€”but also to the entire vote collection process. This "plumbing" is intended to channel your voting power seamlessly into corporate decision-making, but it frequently experiences leaks and blockages along the way. ๐Ÿšฐ

This system is rife with inefficiencies such as over-voting, empty voting, and a lack of vote confirmation, among others. These issues not only make the voting process cumbersome but also cast doubts on its integrity and inclusivity. The end result? A diluted shareholder voice and a missed opportunity to effectively influence corporate management. ๐Ÿ“‰

Before the 2008 crash, at an annual proxy meeting, Bank of America counted 130% of its shares voted,

that is, they received 30% more votes than they had shares outstanding.

Thatโ€˜s just the number of people who actually voted their shares!

Imagine how many shares were sold beyond what they actually authorized and issued.

This violates the voting rights of shareholders and reduces effective corporate governance.

โ€” Lucy Komisar

This system is rife with inefficiencies such as over-voting, empty voting, and a lack of vote confirmation, among others. These issues not only make the voting process cumbersome but also cast doubts on its integrity and inclusivity. The end result? A diluted shareholder voice and a missed opportunity to effectively influence corporate management. ๐Ÿ“‰

The Phone Fiasco ๐Ÿ“ž

Imagine this: You've just received a notification that it's time to cast your vote on important corporate matters for a company you've invested in. Eager to exercise your shareholder rights, you decide to vote by phone, thinking it'll be quick and convenient. You dial the toll-free number provided and brace yourself for what should be a straightforward process. ๐Ÿ’ผ

But then, you're greeted by an automated voice system that seems to have been designed in the pre-internet era. The menu options are confusing, and you find yourself pressing the same numbers repeatedly, hoping to get to the right place. After several minutes of navigating this labyrinth, you're finally connected to a human operator. ๐Ÿ™โ€โ™‚๏ธ

You'd think this would make things easier, but no. The operator rushes through the voting items, barely giving you time to understand the issues at hand. You find yourself asking them to repeat the options, only to be met with audible sighs of impatience. The potential for errors is high, and you start to question the integrity of this voting method. ๐Ÿ”ข

Finally, after what feels like an eternity, you cast your vote. But even then, there's no real confirmation that your vote has been accurately recorded. You hang up the phone, feeling more frustrated than empowered, wondering if your voice will even be heard. ๐Ÿ—ฃ๏ธ

The Paper Chase ๐Ÿ“„

You're an investor who's just put money into a promising company, excited about the potential returns and the chance to have a say in corporate decisions. Then, one day, a hefty envelope lands in your mailbox. You open it to find a stack of papers, including the definitive proxy statement, which outlines the items up for a vote at the upcoming annual shareholder meeting. Alongside it, you find a comprehensive annual report from the issuer, filled with financial statements, executive summaries, and other disclosures. ๐Ÿ“š

You're not alone in receiving this "full set delivery" of materials. The company, often through a transfer agent, has sent out similar packages to all shareholders. The environmental impact of this paper-heavy process is staggering. Reams of paper are printed, and the carbon footprint of the mailing process is significant. ๐Ÿ”ฅ๐ŸŒฒ

You spend the next couple of hours diligently filling out your ballot. After all, this is why you investedโ€”to have a say in the company's future. You seal the return envelope and drop it back in the mailbox, but as you do, a nagging question remains: In an age where almost everything is digitized, why is the proxy voting system so stuck in the past? Why does it feel like your voice is being muffled by an outdated, inefficient process? ๐Ÿ“ฎ๐Ÿ’พ

In all reality, there's no guarantee that your vote will be accurately recorded or even received. Costly paper ballots can get lost in the mail, miscounted, or arrive past the deadline, effectively nullifying your vote. โŒโœ๏ธ

Control Number Quandaries ๐Ÿ”ง

In the traditional proxy voting system, each shareholder is assigned a unique control number. This number is used to identify and authenticate the shareholder's vote. The centralized control number system, while designed to streamline the voting process, often ends up complicating it further. These inefficiencies not only burden companies but also disenfranchise shareholders, diluting their ability to influence corporate governance effectively. Consider these risks and past consequences, among others: ๐Ÿ•ต๏ธโ€โ™‚๏ธ

  • Data Breaches: Centralized systems are a goldmine for hackers. A breach in the system could compromise the control numbers, leading to unauthorized voting or even vote manipulation. ๐Ÿ’ป
  • Tally Errors: The centralized nature of control numbers makes it easier for insiders or third parties to manipulate votes. Errors in the system can also lead to incorrect vote counts, as was the case in these examples:
    • Yahoo's 2008 Director Election: Yahoo was forced to recount votes in its contested 2008 director election due to significant errors in reporting votes. The centralized control system failed to ensure an accurate count, leading to a recount that not only delayed the process but also raised questions about the integrity of the US equity shareholder voting system. ๐Ÿ“Š
    • Proxy Middlemen and Dell Buyout: In the buyout of Dell Inc., T. Rowe Price intended to vote "no" but, due to a complex chain of intermediaries and default settings, their vote was cast as "yes." This resulted in $TROW losing $194 million. ๐Ÿ’ฐโžก๏ธ๐Ÿ—‘๏ธ
    • 2017 Procter & Gamble Proxy Fight: Many proxies were invalidated due to systemic issues such as breaks in the chain of custody and improperly filled proxy cards. The centralized control system was unable to prevent these issues, leading to a recount and undermining the legitimacy of the entire process. ๐ŸฅŠ

Three Top Threats to Democratic Elections โš–๏ธ

Empty Votes โ“

Imagine you're a long-term investor in a company you believe in. You've done your research, you understand the business model, and you're invested not just financially, but emotionally. You care about the company's future and want to have a say in its direction. Now, picture this: someone votes on crucial decisions about the company you love, but they have no skin in the game. ๐Ÿ’”

When you buy shares through a brokerage account, those shares are held in "street name," meaning they're registered in the name of the brokerage rather than in your name. This common practice gives brokers the legal right to lend out your shares to short-sellers. The broker earns interest income from lending out these shares, and most of the time, you, the actual owner, are none the wiser. ๐Ÿ‘€

This practice is usually buried deep in the fine print of your brokerage agreement, and let's be honest, how many of us read that cover to cover? So, while you think you're holding shares of a company you believe in, those shares could be lent out to someone betting against the very same company you're supporting. The kicker? The person borrowing your shares also inherits the voting rights attached to them. ๐Ÿ“œ

Long story short, they've borrowed shares or used derivatives to acquire voting rights without actually owning the stock. This is the unsettling reality of empty voting. They can vote on mergers, leadership changes, and other pivotal matters without worrying about the consequencesโ€”you will. ๐Ÿ˜ 

They can, in fact, throw out your vote and just not count it.

They can randomly assign your vote to some real proxy that wasnโ€˜t voted.

They can vote what shares they actually do have proportionally

based on how many phantom votes come in. Itโ€˜s all done in secrecy.

They donโ€˜t have to tell you, they donโ€˜t have to tell the NYSE, they donโ€˜t have to tell anyone.

They donโ€˜t have to tell the company whose shares they voted.

โ€” Dr. Susanne Trimbath

This disconnect between voting power and economic interest is more than just unfair; it's a threat to the very essence of shareholder democracy. It's a loophole in the system that allows for the manipulation of outcomes, diluting the voice of shareholders who are genuinely invested in the company's future. The emotional toll of this can be significant. Imagine watching powerless as decisions are made that you know are not in the best interest of the company you care deeply about. ๐Ÿญ

Overvoting ๐Ÿคฏ

Picture this: You're at a town hall meeting, and everyone is given a single token to cast their vote on community issues. You drop your token into the voting box, confident that your voice will be heard. But then you notice something oddโ€”some people have multiple tokens, and they're gleefully dropping them into the box. Your heart sinks as you realize that your single vote has been diluted, overshadowed by the unfair advantage of others. This is the essence of overvoting in the corporate world, a system where the "one share, one vote" principle is often compromised. ๐Ÿ˜ž

In the traditional proxy voting system, overvoting is a rampant issue. It occurs when more votes are cast than there are shares available, often due to the lending of shares by brokers. This dilutes the voting power of individual shareholders and creates a chaotic, unreliable voting landscape. It's like a game where the rules are constantly changing, and not in your favor. ๐Ÿ”„

Veil of Anonymity ๐Ÿšซ

Now, let's add another layer of complexity: the OBO/NOBO rule. Brokers have the option to classify your account as either an "objecting beneficial owner" or "non-objecting beneficial owner." OBO is the default setting, which means you're anonymous to the companies you're investing in. Learn more in this full blog post๐Ÿง

The OBO/NOBO conundrum doesn't just create a barrier to effective corporate governance; it also has a financial impact that many investors are unaware of. When you're a beneficial owner, brokers essentially charge companies whatever they want to distribute your proxy materials under SEC Rule 14a-13(a)(5). This creates a perverse incentive system where brokers are motivated to request as much material as possible, just so they can bill the issuer more. ๐Ÿค‘

This practice has even led to a bizarre bidding war among physical material distributors. These distributors will bid up the price they're willing to pay a broker for the "privilege" of sending out proxy materials. Why? Because they know they can pass those costs onto the companies. It's a major source of revenue for brokers, but it's a cost that public companies have to bear, often without fully understanding the extent of these charges. ๐Ÿ”ฅ๐Ÿ’ธ๐Ÿ”ฅ

This system is not just inefficient; it's fundamentally broken. It distorts the true cost of shareholder engagement and puts a financial strain on companies, which ultimately affects their performance and, by extension, shareholder value. Further, these middlemen don't just make money from distributing proxy materials; they also charge companies exorbitant fees for a list of OBO holders with basic information. It's a double whammy that not only keeps the companies in the dark but also drains their resources. ๐Ÿ’ฅ

Our Solution ๐Ÿ› ๏ธ๐ŸŒ

Enter blockchain technology. Our solution leverages the transparency and security of blockchain to ensure that each share corresponds to a single vote. When you cast your vote through our wallet app, it's recorded on a public ledger that is immutable and transparent. No more secret backroom dealings, no more vote manipulation. ๐Ÿ”

With direct registered ownership, your vote truly counts. You're not just a face in the crowd but a recognized, valued participant in corporate governance. It's time to take back control, to ensure that your voice is heard loud and clear. With blockchain-based voting, we're not just fixing a broken system; we're building a new one, rooted in fairness, transparency, and trust. ๐Ÿ’Ž


Our systems make every vote traceable and transparent. Once voting opens, we send investors standard proxy notices. But instead of dialing a call center or mailing back a postcard, investors use a wallet app to 
cryptographically vote with math. They go through an interface with the voting items specific to each meeting, selecting "for," "nay," "abstain," or "withhold" for each item. These choices get encoded in a transaction memo, which is then sent to a public blockchain voting address. At the meeting, vote results from these public distributed ledger are reconciled with shareholder record-date balances as recorded on the blockchain. Anyone can tally up public transaction memos to verify final counts, and all votes have the same security backing our stock transfers. ๐Ÿ”


So, if you're tired of navigating the labyrinthine world of proxy voting, where middlemen dictate the rules and companies are left in the dark, it's time for a change. At Block Transfer, we're revolutionizing the way proxy voting is done. No more hidden fees, no more anonymity barriers, and no more convoluted processes. Just a straightforward, user-friendly system that makes your voice heard. If you're ready to make the switch and experience the future of proxy voting, we invite you to schedule a free brief consultation with us. Let's change the game together. โ›“๏ธ

Sources

Block Transfer Yellowpaper

Komisar's Phantom Shares

Trimbath's Post #1, #2, & #3

John Wooten

Chief Compliance Officer

John, host of the Stock Market Secrets podcast, wrote his first book on asset management in high school. He closed down his hedge fund after its best year ever out of frustration with inefficient markets to bootstrap Block Transfer. John graduated from Georgia Tech with a BS in Computer Engineering.