Last week the European Sustainable Investment Forum, Eurosif, published a Public Policy Position Paper on Sustainable and Responsible Investment . It calls upon the European Commission to adopt measures facilitating the exercise of shareholder rights and transparency.

Haven’t we been here before? Well, we’ve been in this direction before, certainly, but not this far. The Shareholder Rights Directive of 2007 (which is due for implementation by the member states by August this year – see our recent blog on Finland) dealt with a number of barriers in the field of company law but fell short on practical barriers, which still persist, amongs securities and voting intermediaries in the voting chain (namely custodians and their voting service providers, ‘VSP’s’).

The EUROSIF paper calls for improved accountability of service providers in reporting to their clients not only confirmation of votes cast but also, where this is not possible, a precise explanation as to why. A sort of ‘comply or explain’, if that sounds familiar. It goes on to emphasise that “making service providers more accountable will allow identifying those that are trustworthy”. It also calls for regulation which  mandates custodians to facilitate client choice as to the VSP they use, rather than automatically having to use the VSP appointed by the custodian – a very similar concept to the notion of ‘best execution’ which has been so thoroughly bedded in under the Giovanini process for clearing and settlement.

Is this really necessary? It certainly is. As if to illustrate the point, we have this week again seen working examples of how intermediaries hinder the voting process, this time in the Netherlands. Whilst issuers have changed their Articles of Association and sometimes even their share structures to eliminate the need for the immobilisation (blocking) of shares in order to register them to vote, not all custodians have amended their processes to eliminate the blocking of shares in practice, meaning that their underlying clients still have to choose between exercising their right to trade or their right to vote.

To make matters worse, some VSP’s who work as voting agents for the custodians do not distinguish between custodians who require blocking and those who don’t. They hedge their bets and treat the whole market in question as a blocking market. So all it takes is for one local market custodian (sub-custodian) to require share blocking to create a situation where their clients and the clients of VSPs who won’t process blocked and unblocked instructions in the same market all get told that the Netherlands is a ‘blocking market’. Try explaining that to an Investor Relations professional such as Dorothy Hillenius at ING who has gone to the trouble of specifying in their meeting notice that “it is determined that shareholders … who were shareholder …  on 30 March 2009 after the closing of the books, have the right to attend the meeting and to exercise their voting rights in accordance with the number of shares … they hold at that specific date”, let alone to the shareholders who received the notice.

The answer? Allow investors the right choose to use a service provider who doesn’t require blocking when it’s not necessary. Investors have to assert and use that right as much as we need to see regulators establish and protect it.

Last Updated: 21 April 2009