As Swiss pharma giant Novartis squared up to the first of the 2009 European season’s shareholder resolutions, it looks like voting irregularities downstream may be calling the results into question. Novartis are said to be ‘furious’ at the apparent foul ups caused by the overly complicated ‘chain of intermediaries’ which have left some shareholders with blocked shares, despite the express statements from Novartis that they are a non-blocking security in Switzerland.

Manifest got the heads up on the fiasco after a plaintive cry from a customer demanding to know why they couldn’t deal in Novartis’ shares after their votes had been passed along the chain.  A few phone calls later and it transpires that a custodian voting service provider (VSP) had passed along the votes – and that a blocking instruction had gone with it. Numerous phone calls later, it transpires that the VSP in question maintains a list of custodians that block. OK that seems fair enough but it transpires that they only refrain from sending blocking instructions if they have been told specifically by the sub-custodian that they don’t block, notwithstanding anything on the proxy statement.  Which assumes that either custodians or subcustodians really understand proxy, which, with all due respect, they don’t because they have outsourced the whole messy proxy business to VSPs.

But like Alice in Wonderland, or should it be blunderland, this case gets curiouser and curiouser with VSP and custodian openly contradicting one another on policy and procedure.

Manifest worked with Novartis to facilitate the client’s transaction and vote; luckily there was no adverse share price movement – this time. This whole shambles highlights the urgency of reviewing the market channels monopoly that custodians impose on alternative vote platforms such as Manifest. Had Manifest been given direct access to the local vote tabulator, we could have managed the situation directly for our client rather than being left in the dark as to what others were doing with client assets and associated rights. But because we were forced to pass votes through an intermediary, who in turn was talking to an intermediary, the client didn’t get what we call “Best Execution” because they can’t choose the agent that executes for them.

According to Manifest’s latest review of proxy voting trends, Switzerland records the third lowest voting turnout with an average turnout of 43.1% across all event types, almost 20% lower than the rest of Europe’s main markets. Only Belgium and Denmark manage lower turnouts. The biggest barrier to getting voting levels up appears to be the perception that Switzerland is a ‘blocking’ market. It’s true that some companies do impose share blocking, however not all companies do so – Novartis being an example of a company whose meeting notice explicitly states there is no share blocking.

Where custodians and sub-custodians block shares needlessly, the willingness of international institutional investors to submit voting instructions is reduced – as highlighted by the the number of voting policies that included as statement indicating that votes will not be cast in blocking situations. Turnout will therefore be depressed at companies even where they explicitly state that there is no blocking requirement.

Over the past decade, the custody business has instituted a massive landgrab in the shareholder services and support area. But as in many things in life, being a ‘jack of all trades’ can make you the master of none. To then prevent anyone from offering clients a better alternative is nothing short of market abuse. Custodians have never had, nor should they have, a monopoly over choice of voting agent. How many investors would tolerate interference with choice of, say, stockbroker? None.

What happens next remains to be seen. While Novartis are fighting an unwelcome resolution in their view, they clearly recognise that it’s important for all shareholders to have their say and have invested heavily in a proxy solicitation program to get the votes in. Let’s hope they call for a complete audit of the voting to see if any other shareholders were similarly wrong-footed.

Last Updated: 20 February 2009
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