A shorter version of this article appeared in Financial News on Monday, October 10th 2011
The City might sometimes wish it otherwise, but voting rights are central to shareholders exercising oversight of the companies they invest in. Since the publication of the Cadbury Report in 1993 there has been great emphasis on the role of board structures, executive pay, committees and directors. Latterly there has been scrutiny of the role of shareholders with a view to making Stewardship a more balanced relationship. Despite the thousands of words expended on these frameworks, the role of the vote and the mechanics of proxy voting remain little understood and, in some cases, cared for even less.
This apathy or indifference is as disappointing as it is surprising. After all, without shareholder votes takeovers can’t happen, auditors can’t be appointed, directors cannot be removed or new shares issued, all key drivers of City activity.
Yet some of the most sophisticated global investors are getting exercised, again, about a perceived scandal of missing votes. If it were true that votes were going missing that would indeed be a scandal. According to Manifest’s latest research the average AGM turnout of FTSE100 companies now stands at 70.44% – so it’s difficult to reconcile the grumbles about “missing” votes, as clearly votes are being counted. One hundred percent turnout is unrealistic given the 20 million or so retail shareholders who won’t or can’t vote not counting the global owners of UK plc who don’t want to be counted.
More often than not the “blame” for “missing” votes is placed on the vote counters, the registrars. This is both unfair and unfounded. In registered share markets such as the UK tabulation can not only be definitively verified but legislation exists for shareholders to demand independent scrutiny. According to the registrars this right has been rarely used and even where it has, no material issues have been identified. But given that healthy competition exists between the registrars (with the threat of losing a mandate hanging over their heads), it’s hardly surprising that quality and innovation are their key business drivers.
Some have even suggested that proxy voting agencies are to blame and should be “showing greater awareness”. We would say to investors: “if you re not getting the service you need or want then shop around for ‘Best Execution’ firm which puts the interests of investors at the top of their agenda, which doesn’t make money behind investors backs by selling their voting data without consent and actually designed a vendor-neutral electronic voting standard over a decade ago.”
Just like forex or equity broker selection, it isn’t written anywhere that a custodian has the final say over which intermediaries asset owners should be using, yet most investors accept this as the status quo without question.
Our experience (which dates back to 1995) is that there is a disconnect between the beneficial owner, the asset manager, the custodian and the custodian enforced vote service provider. In most cases the votes are not ‘missing’, they are simply owned and voted by someone else in a pooled nominee account.
Investors who choose custodians that force pooling of assets by default give up very important legal protections (who would have thought that Lehman Brothers et al would get into difficulties). Very importantly in this enlightened stewardship age, pooled accounts compromise the ability of issuers to know who their shareholders are.
But pooled accounts weren’t always the norm. Until the late 90s, when the UK had a custody business to speak of, designated accounts were the rule, not the exception. To paraphrase Professor David C Donald of the Chinese University of Hong Kong; “Once this (pooling) was done, issuers no longer knew who owned their shares; they only knew a depository or its broker participant was registered as a shareholder. The heart of the securities market went dark.”
So, if shareholders want clarity on their voting the answer is pretty simple. Turn the lights back on.