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Why Institutional Investors Often Outsource Proxy Voting
Apr 12, 2023
If you are an institutional investor, you may have considered outsourcing proxy voting, and there is a high likelihood you are already doing so. It is worth examining the costs and benefits of outsourcing this crucial compliance issue, as well as determining how much you should expect to pay and how much time you can save by doing so.
The primary reasons most institutions outsource proxy voting are cost and risk. By cost, we mean opportunity cost - the hours spent on an area where you may not have expertise, such as corporate governance. If you do not invest the necessary time or lack the expertise, the compliance and reputational risks can have significant consequences, potentially impacting your finances.
Let's assume that you spend two hours per company or 100 hours total on proxy voting for about 50 companies. Furthermore, let's assume the high-level personnel needed to adequately fulfill this function have an opportunity cost to your firm of $1,000/hour. In this case, you have incurred $100,000 in opportunity costs, assuming there are no glaring errors such as voting for excessive CEO compensation or, worse, a compliance failure.
What would it cost to outsource those same 50 votes? With special meetings, 50 companies would result in approximately 55 to 65 meetings (so the cost above would be even higher than stated), but for coverage of 50 U.S. public firms using our "standard guideline," the list price for voting, analysis, and support is a fraction of the cost of doing the work internally. You will still want to spend a few minutes reviewing each report, as suggested by regulators, and audit several reports each summer. This also does not account for the impact on your staff. Having worked in this field for 20 years, we can attest that proxies can be dull - until they are not, of course.
In conclusion, outsourcing proxy voting can significantly reduce opportunity costs and mitigate compliance and reputational risks for institutional investors. By carefully selecting a reliable outsourcing partner, firms can focus on their core competencies while ensuring that proxy voting is handled professionally and efficiently, ultimately benefiting their clients and overall business performance.
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By Alyssa Festin
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