Proxy Advisor Proposal at Microsoft
Presented by Mark Latham at Microsoft's Annual Meeting of Shareowners, November 14, 2006
WHEREAS many shareowners lack the time and expertise to make the best voting decisions, yet prefer not to always follow directors’ recommendations, because of possible conflicts of interest;
WHEREAS shareowners have a common interest in obtaining sound independent advice, but often insufficient private interest to justify paying for it individually (the “free-rider” problem);
THEREFORE BE IT RESOLVED that Microsoft Corporation shareowners request the Board of Directors to hire a proxy advisory firm for one year, to be chosen by shareowner vote. Shareowners request the Board to take all necessary steps to enact this resolution in time to hold the vote at the year-2007 shareowner meeting, with the following features:
- To insulate advisor selection from influence by the Company’s management, any proxy advisory firm could put itself on the ballot by paying an entry fee, declaring the price (no more than $30,000) for advisory services for the coming year, and providing the address of a website describing their proposed services and qualifications.
- The winning candidate would be paid its declared price by the Company, and make advice freely available to all Company shareowners for the subsequent year, on all matters put to shareowner vote except director elections. (Advice on director elections is excluded to satisfy SEC rule 14a-8(i)(8).)
- Performance of the advisory firm would not be policed by the Company’s management, but rather by gain or loss of the advisor’s reputation and future business.
- Brief summary advice could be included in the Company proxy, with references to a website and/or a toll-free phone number for more detail.
- The decision of whether to hire proxy advisory firms in later years would be left open.
The proxy advisor would be paid with Company funds to give shareowners an independent professional opinion. Independence would be further enhanced by having shareowners choose the proxy advisor. This could also increase competition in the proxy advisory business, because new entrants could earn fees on a company-by-company basis, without covering thousands of companies.
Example of shareowners’ lack of time and expertise: http://boards.fool.com/Message.asp?mid=19682916 : “I tried to read the proxy statement, but I still don’t understand whether the change is shareholder friendly or not.”
Example of mistrust of directors’ recommendations: Harris Poll, September 2003, at www.sec.gov/rules/proposed/s71903/gmcentee092403.pdf : “Support for corporate management nominees is also mixed with majorities of shareholders having withheld support from a management nominee.”
The conflicts of interest among managers, directors and shareowners are described in Robert Monks and Nell Minow’s 2003 book Corporate Governance, along with shareowners’ “free-rider” and “rational ignorance” problems.
Articles discussing the company-pay system for proxy advice are on the Corporate Monitoring website at www.corpmon.com/publications.htm.
BOARD RECOMMENDATION [Footnotes added]
THE BOARD RECOMMENDS A VOTE AGAINST THIS PROPOSAL. The Board believes implementation of the proposal would not be in the best interests of the Company’s shareholders.1 Eight of the ten members of the Board are independent directors2 who exercise their independent judgment to determine what recommendations to make to the Company’s shareholders about how to vote on matters presented at the Company’s annual meeting. The Board and management seek to provide complete and understandable information upon which you can decide how to cast your vote.
Each member of our Board brings his or her unique business experience to the Company. The Board, working with management, regularly evaluates the Company’s business strategies. As a result, the Board believes it is in the best position to make informed recommendations to the Company’s shareholders on matters to be voted upon. Nevertheless, shareholders desiring third-party analysis and recommendations can access, on the Internet and through other readily-available sources, a significant amount of published research and other literature about the Company and issues of importance to shareholders.3 With this information, we believe our shareholders are capable of making prudent decisions on director elections, shareholder proposals, and other matters submitted to a vote of shareholders.
We do not believe adding4 the advice of an unsupervised5 firm, chosen with inadequate process,6 would be in your best interests. Shareholders can consult those resources they consider useful, without being subject to the potential undue influence of a single,7 unaccountable6 source appearing in the Company’s Proxy Statement. The proposal does not require any minimum qualifications or experience for a proxy advisory firm to put itself on the ballot.8 The voting mechanism by which the firm would be chosen permits no in-depth review of the firm’s qualifications or discussion with the firm about its qualifications or approach.9 It is unclear on what basis the firm would be accountable for providing inaccurate or misleading information.10 We consider it unwise to engage a proxy advisory firm without evaluating the need for such advice,11 the quality of the firm’s work,12 the process by which recommendations would be made, or providing an accountability mechanism. Finally, the proposal calls for the firm to be paid without regard to the reasonableness of the compensation for the work performed.13
The Board therefore does not believe that adoption of the proposal is necessary or in the best interests of the Company or its shareholders and respectfully recommends that shareholders vote against the proposal.
Mark Latham's responses to the board's recommendations:
- This Proposal would make independent proxy voting advice available to all Microsoft shareowners, in competition with the board's advice in the company-paid proxy. By thus reducing the Board's influence, it may not be in the best interests of the Board.
- This term "independent directors" is a legal definition. But calling some directors independent doesn't make them independent. The fact that the directors select each other is likely to compromise their independence of each other.
- While there is much public information available about Microsoft, it remains difficult for shareowners to decide on key proxy matters, such as the appropriate form and amount of executive compensation. And the Board has different interests than the shareowners in such matters.
- As the Board mentions here, the independent advisor's recommendation would add to, rather than replace, the Board's recommendation on which way to vote. So shareowners could benefit from both sources of advice.
- Shareowners would choose the advisor based on its reputation in the financial community. Thus the advisor would in effect be supervised by the financial community in maintaining its reputation. Supervision by the Board would make the advisor no longer independent of the Board, so the Proposal rules out Board supervision.
- The proxy advisory firm would be chosen by shareowner vote on a ballot open to competing candidates. The board is "elected" by shareowner vote on a ballot with no competing candidates. Which of these is an inadequate process? Which of these is more accountable?
- The Company's Proxy Statement now features only a single source of voting advice -- the Board. This Proposal would provide a second source, independent from the Board. The reason we have shareowner voting at all is because of the obvious conflicts in letting the Board decide its own succession and compensation without shareowner control. So it makes sense to get voting advice from a source other than the Board.
- Shareowners would assess a proxy advisor's reputation (including qualifications and experience) when choosing which to vote for.
- On the contrary, the Proposal does not prevent such in-depth review or discussion. Competing advisor candidates would have a strong incentive to facilitate informing shareowners as to their qualifications.
- As the Proposal states, "Performance of the advisory firm would not be policed by the Company’s management, but rather by gain or loss of the advisor’s reputation and future business."
- Shareowners will evaluate the need for this independent advice when they vote on this Proposal. We shareowners need independent voting advice for the same reason we need to have shareowner voting at all. If it were sufficient to simply vote following the Board's recommendations then we wouldn't need to vote, but instead could just leave all decisions to the Board. The reason why we have shareowner voting is that there would be conflicts of interest inherent in leaving all decisions to the Board.
- The quality of the advisor's work will be evaluated by the financial community in determining the advisor's reputation, which will affect future shareowner votes and thus the advisor's future business.
- The Proposal calls for each advisor candidate to declare its fee in advance. Thus shareowners would vote to choose an advisor with regard to the reasonableness of its compensation for the work performed.
The complete 2006 Microsoft Proxy Statement includes the above Proposal, Supporting Statement, and Board Recommendations, but not the above footnotes (1 through 13) which are added here.
Mark Latham's speech at the Microsoft AGM:
Thank you Mr. Liddell. I’m Mark Latham, a Microsoft shareowner.
As described in Shareholder Proposal #3, I propose that we hire a proxy advisory firm chosen by shareowner vote.
This would increase competition in the proxy advisory business.
It would make higher quality independent voting advice available to all of us Microsoft shareowners, including individuals.
This would give our directors more incentive to serve shareowner interests, thus improving Microsoft’s performance.
The problem of voters lacking enough information to hold leaders accountable, is shared by both corporations and democracies. The same solution can be applied to both. Voter funding of information can reduce corruption in corporations and in democracies.
I used to think that corporations would lead this reform, and democracies would follow.
But now it seems that democracies will lead, and corporations will follow.
I expect that Microsoft shareowners will not approve this proposal today, although I urge you to do so.
But it looks like it will be approved for the first time, tomorrow, by the University of British Columbia student council, and implemented immediately for their upcoming election in January.
If successful, it can then spread to other universities, to larger democracies, and then to corporations. You can watch the progress of this movement at website VoterMedia.org.
Voting Results on this Proposal:
This voter-funded media proposal was supported by only 2% of Microsoft shareowners! This is the lowest result in the 7-year history of this campaign. The highest was 20% support at Oregon Steel in 2004.
One pattern that emerges from our voting results is that shareowners seem more conservative at larger firms. It makes sense to try a new idea at a smaller firm first, then extend it to larger firms if it proves beneficial.
As predicted in my speech above, the UBC student council did approve voter-funded media for their January 2007 election -- the world's first implementation.