At Tesla’s recent annual meeting, shareholders approved an unusual compensation proposal for CEO Elon Musk – if achieved, he could be the world’s first trillionaire. The vote passed by a comfortable margin of 75% in favor.
An interesting feature of this high-profile proxy vote, beyond the details of the pay package Musk was awarded, was the decision by several large institutional investors to publicly disclose their vote in the run-up to the annual meeting.
“Pre-disclosure” of proxy votes refers to the practice of announcing which way an investor will vote well in advance of the deadline. In the instance of the Tesla pay vote, several large institutional shareholders, including CalPERS, the Florida State Board of Administration, and Norges Bank Investment Management, all pre-disclosed their votes – some for and some against. It is an important signal about what the future of proxy voting might look like.
More broadly, just a few dozen institutional investors, including some of those listed above, currently pre-disclose their voting intentions as a matter of practice. Such pre-disclosure offers several significant benefits to the way the proxy voting process functions and how investors operate within it.
It can show leadership.
The funds that pre-disclose their votes are, by and large, fiduciaries managing other people’s money. Beneficiaries, whether they be members of a pension fund, public taxpayers, or retail investors in a mutual fund, expect transparency as to how and why their vote is being cast a certain way. By pre-disclosing in a contested situation like Elon Musk’s pay package vote, they display leadership in doing their own research on the issue in question, voting in line with their own principles, and then publicly standing up for those principles.
It shares the insights of an informed group with dedicated stewardship resources.
Knowing in advance how major investors are voting enables shareholders to vote in line with institutions that share their own interests, whether that’s based on market outlook, views on proper corporate governance, or other principles. The resources needed to have an in-house research team are typically only found in the biggest and most sophisticated funds in the world. Smaller or more local funds, or individual retail investors, don’t have the time and resources needed to do this work themselves (hence the existence of proxy advisers). Large funds pre-disclosing their votes allows other investors to take into account another shareholder’s analysis of the ballot and offer, in some cases, a differing opinion from the two major advisory firms.
It can enable market participants to form a consensus over time.
In many cases, important proxy votes are taken under tight deadlines. Calls are being made up to the last minute, trying to get yes or no votes. Pre-disclosure by major shareholders in advance enables shareholders to see which way a vote may go before the meeting. Currently, this signaling function is predominantly filled by proxy advisers, and specifically by two firms, ISS and Glass Lewis. Adding more voices to the mix creates a more competitive marketplace for informed and expert perspectives on how companies should be governed.
Broader pre-disclosure could eventually siphon some influence away from advisory firms and toward institutional investors. Data from the Tesla vote showed that “day-of” voters follow advisors’ guidance more, even though pre-disclosers also cited proxy advisors in their decisions. In short, diminishing the role of the proxy advisors is still a ways off.
So why don’t more shareholders pre-disclose their votes? The first reason is that it is uncomfortable. Funds that pre-disclose generate a lot of political and press interest, potentially creating headaches for the fund. Even if it is better for the system, it may be hard for those who pre-disclose.
The second reason is, for some asset managers in particular, a concern about running afoul of the SEC’s Schedule 13G rules, which require certain investors to report their ownership of a public company’s stock. A potential solution here could be for the SEC to clarify that pre-disclosure would not disqualify managers from being able to file 13Gs (and instead push them into the more onerous 13D filing regime).
And finally, some funds might like to keep their cards hidden until the last minute to increase their bargaining power.
The challenge with today’s proxy system is that many participants are calling for a wholesale change when there are incremental improvements that either investors or issuers could make. Pre-disclosure (or other updates like the unbundling of proxy advisors’ services, or calling special meetings for particularly consequential votes) can be uncomfortable, but would improve the way the system functions over time.
The Tesla vote shows that even when pre-disclosure doesn’t sway the outcome of a vote, it can still offer clarity about which investors support which positions and why—information that’s valuable for corporate decision-making and accountability. The discourse that pre-disclosure brings to the process, along with its potential to help clarify often complex issues, should not only benefit investors overall; it should also act as a helpful catalyst for constructive engagement between companies and their shareholders.