Voting matters
Liam Kennedy looks at the impact IT will have on the paper-bound
world at corporate governance
Fewer than 50 per cent of UK institutional shares are currently voted,
according to the National Association of Pension Funds (NAPF). Anyone with
experience of the UK’s share voting system will probably be aware of the
reasons why this figure is low. Apart from a show of hands at a company AGM,
the only way for institutional shareholders to vote is by instructing the
firm’s chairman, in paper, to vote at the appropriate meeting.
The complexity is such that trustees have frequently been tempted to
ignore the issue in the hope that it will simply go away. But no longer. Along
with its cousin, socially responsible investment, corporate governance is an
issue close to the government’s heart. And technology is providing
solutions which could simplify the whole procedure for trustees and others
involved with scheme administration.
Statistics show that pension funds are the leading UK institutional
investor. A 1998 survey for the Institutional Fund Managers Association (IFMA)
showed that pension funds account for 49 per cent of UK institutional stock
market investment - which amounts to some 28 per cent of all UK equity
investment, according to the NAPF - a considerable chunk.
That sheer weight of numbers is one of the reasons why the government is
keen to promote corporate governance. In this it has the backing of the likes
of the NAPF and the Association of British Insurers (ABI), as well as the Bank
of England. There is also evidence that companies dislike complacency on the
part of shareholders, “We deplore institutional voting inactivity,”
one chief executive was quoted as saying in the recent report of an industry
working group on corporate governance.
The NAPF’s Newbold Inquiry chaired by former Hanson company
secretary Yve Newbold, recently proposed electronic voting as a solution to the
UK’s low voting figures if compulsion was to be avoided. However, this
would require a change to the current statute and would in any case, take
several years to establish on a useful basis. And electronic voting would
probably remain the preserve of larger companies, at least at first. It would
also not solve the problem of the decision-making chain inherent in the voting
process.
Managing director of proxy voting service Manifest, Sarah Wilson, points
out that the final lodgement of votes is only the final part of a long chain.
For this reason, electronic voting would not itself solve the problem of the
complex inter-relationship between scheme manager, trustees, fund managers,
custodian and company registrars. Aside from the issue of complexity in the
voting system itself, the majority of shareholder voting is non-contentions,
so-called “housekeeping” issues which are difficult to get people
excited about. These include re-appointment of directors or auditors and the
composition of committees. According to Christpher Baldry the NAPF’s
voting issues service manager, there is also a “hard core” of
trustees and managers who regard corporate governance as peripheral.
But Baldry explains that there are sound investment and fiduciary
reasons for taking corporate governance seriously. “We believe that the
right to vote is significant and it is almost a fiduciary duty to exercise that
right. We would advise pension funds to have a policy and to exercise that
policy wherever possible.”
In theory he continues, firms which respect the role that shareholders
play will be better managed and may provide better shareholder value. Sarah
Wilson of Manifest puts the matter succinctly: “Management is the hired
hand of the shareholder, not the other way round”. In the corporate
pensions sector it is common for trustees to delegate voting discretion to fund
managers, with the expectation that they will vote with management most of the
time. Other schemes use the service provided by their global custodian. But
there are also a variety of advisory and execution services available in the
marketplace, some of which are IT-based.
The NAPF's voting issues facility is a subscription service covering the
FTSE 350. It provides advice in the form of a research-based service which
carries out analysis of company reports and meetings. Subscribers can receive
reports in paper copy or via the internet. "We do intend to enhance the service
to become a vote execution service," says Baldry.
"Clients use our service to come to their own conclusion as to how to
vote. He explains. "Virtually all major fund managers subscribe, as well as
some of the larger pension funds. Mostly there is delegation of voting
authority, but some want to monitor how fund managers are voting on some
issues. Our voting service provides a mechanism for them to do that."
Corporate governance specialist PIRC also offers services for trustees.
It offers an independent research service, as well as voting guidelines based
on PIRC's own interpretation of best practice, and a vote execution service.
PIRC representatives can attend meetings or vote in proxy on behalf of clients.
Corporate governance reports can also be delivered electronically.
The ABI offers what it describes as a fully electronic service, which
covers all firms in the FTSE All-Share index. Richard Regan, the ABI's head of
investment, explains that the service covers company reports and accounts, and
monitors these for consistency with corporate governance codes such as Hampel.
If trustees want to implement a policy before the next round of AGMs
then they must act fast.
However if trustees wish to control voting policy but also delegate
responsibility to a third party, the process becomes more complex.
Conventionally, the responsible individual within the pension scheme, such as
the scheme manager or secretary must find out trustees' voting intentions each
time a new matter arises. A key problem is that they often meet infrequently:
“Timing is a difficult matter because we have got to find out that
the meeting is happening, decide what we are going to do, and register that
vote four days before,” one pension scheme official explains.
Manifest provides a bespoke vote-execution service according to
trustees' individual policies, but gives no guidance or
research (see correction below). It claims to be "de-materialising" the
UK's voting system, by offering a service which converts our entirely
paper-based arrangements to a process which is 95 per cent electronic.
The Essex-based firm creates around 150 templates to cover the most
frequently occurring voting issues. Votes can then be cast according to
whatever policy has been adopted by trustees or fund managers. Issues not
covered by the templates are referred back to whoever is responsible for a
decision to be made. In order to gain access to information on AGMs and other
relevant corporate information, the firm invests in the All-Share index.
Particularly useful is the provision of an audit trail, to inform trustees that
their instructions have been executed.
But Wilson says that if trustees want to implement a voting policy in
time for the next round of annual general meetings in early 2000, they must act
fast. "I would say to every trustee that this needs to go on the agenda of
their trustee meeting no later than the year end." If not, she explains, fund
managers may face difficulties coping with the administrative load.
As the NAPF's Christopher Baldry puts it: “Trustees will come under
increasing pressure from the beneficiaries of the pension fund to explain their
approach - especially their attitudes to social and environmental issues. As a
result, trustees will find it very hard to justify a policy of non-voting to
beneficiaries of their scheme in the future."
Pensions Age
Author: Liam Kennedy
October 1999
Manifest correction
In the October edition of Pensions Age, a supplement feature headlined
Voting Matters inadvertently suggested that the proxy voting agency
Manifest does not offer research or guidance on shareholding voting policy.
We would like to make it clear that Manifest does offer research and
guidance on these matters.
Pensions Age
November 1999
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