Goldman Sachs Investor Loses Vote on Counting All Votes the Same Way

CORRECTION: This article, originally published at 12:37 p.m. on Thursday, May 21, has been updated to correct the size of Equality Network Foundation's holding in Goldman Sachs in the second paragraph.

NEW YORK (TheStreet) - When Goldman Sachs investors gathered in San Francisco on Thursday for the company's annual meeting, one item on the agenda was making sure their votes matter.

The Seattle chapter of Equality Network Foundation, which owns 20 shares of Goldman Sachs valued at about $4,000, urged the bank to begin using a simple-majority system to determine whether all proposals -- whether from management or shareholders -- pass or fail. 

Under Goldman's (GS) current plan, the foundation says, board members proposed by management are elected if the number of supporting votes is larger than the number opposed. Votes to abstain are ignored. The system is different for all other proposals: Votes to abstain are counted as votes against.

"This proposal is needed because Goldman Sachs counts votes two different ways in its proxy," Equality Network argued, "a practice we feel is confusing, inconsistent, does not fully honor voter intent, and harms shareholder best-interest."

Equality Network see two problems with the bank's voting procedures. First, ignoring abstentions for the election of directors may artificially inflate the support they receive. Second, counting abstentions for others proposals -- including all those submitted by shareholders -- makes it more difficult for them to pass.

"This is a typical 'heads, I win; tails, you lose' rule, designed to discourage shareholder activism," said John Coffee, director of the Center on Corporate Governance at Columbia University School of Law. "Conceivably, the SEC could stop this, but don't hold your breath waiting for them to act."

As it turned out, most of the company's shareholders didn't share Equality Network's concern: its proposal garnered only 5% of votes. Goldman Sachs has about 400 million shares outstanding and a market value of about $93 billion.

The bank is not alone in how it counts -- or doesn't count -- shareholder votes. Equality Network filed a similar proposal with JPMorgan Chase (JPM), which only received 7.4% of votes at the New York company's shareholder meeting on Tuesday. 

A 2013 study by the California Public Employees Retirement System, or CalPERS, found that 52% of companies in the S&P 500 and Russell 1000 indexes include abstentions while 48% exclude them. That study illustrated how proposals that CalPERS submitted to Nabors Industries would have passed if abstentions were excluded.

"In general, the data on this point suggests there is no clear consensus about what it means for a share to be 'cast' or 'voted,' and whether abstaining is an act of voting," said CalPERS, which oversees about $307 billion in investments. "It also suggests some difference of opinion about whether it is reasonable to calculate votes -- as Delaware law permits -- out of all shares entitled to vote on a matter, even if they have not actually voted 'yes' or 'no.'"

The provisions of Delaware law are important because more than half of all publicly traded U.S. companies -- including Goldman Sachs -- are headquartered in the state, the second-smallest in the U.S. That number includes 65% of all Fortune 500 companies.

The failure of a shareholder proposal doesn't necessarily mean it won't lead to change, however.

"The mechanics of a shareholder resolution aren't as important as the amount of support [the vote] gathers," says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "It is not a win-lose situation."

Even if a proposal fails, a significant minority of "for" votes serve as a barometer of shareholder sentiment, Elson says, an opinion in which Goldman Sachs concurs.

"Our board reviews any matter that receives the significant support of our shareholders, regardless of whether the matter has technically "passed" under the applicable legal standard," the company said in its proxy.

 

 

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