The governmental responses to the financial crisis have been many and varied with markedly different approaches being taken on both sides of the Atlantic. One common strand between the European and US administrations has been the role of institutional shareholders and their use – or otherwise – of voting rights to discipline management.
In the US, Barney Frank, the Democrat House Financial Services Committee Chairman has revealed that he is actively considering legislation requiring mutual funds, pension plans and other large institutional investors to publicly reveal how they vote their proxies. Speaking at a hearing on financial services pay last Friday he said: “If you are the owner of shares, you have a privacy right,” Frank said at a hearing on financial services compensation. “But if you own shares on behalf of a fiduciary, you will need to disclose how you vote.”
Although many international pension plans do disclose their voting policies, they are not legally required to disclose how they vote their proxies. The Employee Retirement Income Security Act, ERISA, requires US pension fund administrators to disclose to plan beneficiaries how they vote on their behalf. However, that information does not need to be disclosed publicly. Since 2003 mutual funds have been required to file an annual SEC listing of their proxy votes every August.
Whether the public disclosure of voting will change investor behaviour in the short term is a vexed question. For European shareholders the question has been more directed at the “How” of voting rather than the “What” i.e. publishing long lists of actual resolutions. The “How” is important in that it focuses on the process of policy, decision making and integration with the investment process. There are widespread concerns that a great deal of voting is “automated box-ticking” based on 3rd party recommendations rather than being based on a considered process which takes account of the investment strategy.
According to veteran governance commentator, James McRitchie, voting disclosure is changing behaviour: “Examination can lead to change. We saw that to be the case earlier this week at State Street Global Advisors (SSgA) after pressure from Walden Asset Management and United for a Fair Economy. Prior to their scrutiny, SSgA voted automatically Against ALL shareholder resolutions on environmental and social issues, whether the issue affected shareholder value or not. SSgA will now abstain if the resolution’s economic impact case is not clear, but will vote FOR resolutions where a strong case regarding how this affects shareholder value is made.”
Meanwhile in the UK, although the 2006 Companies Act contains reserve powers for the Treasury or Secretary of State to mandate investor voting disclosure (part 44, s1277) , the June general election would appear to rule out, or at least make very difficult, any introduction of new responsibilities for UK shareholders this proxy season.
Links
Companies Act 2006 Reserve Powers >>
House Committee on Financial Services >>