British readers will be familiar with the mounting scandal surrounding alleged phone tapping at the News of the World when Andy Coulson, the Prime Minister’s communications director was the paper’s editor. The UK, in common with many nations takes personal and data privacy very seriously, and rightly so. When it comes to the post, the only people authorised to open mail without permission are border guards at ports and airports. So in days gone by, when proxies went through the mail, you could be fairly certain that the only people looking at your votes would be the registrars who would be duty-bound to pass this information to the company.
But what about an electronic voting process with multiple intermediaries, each of whom is acting under contract to different parties and not necessarily directly accountable to either the shareholder or the company? What happens then? Can you be certain that your votes are only being used for their intended purpose? It might never have occurred to shareholders or companies to think about “vote tapping” given the historic presumptions of communications privacy. Let us be clear, Manifest has never and will never give or sell voting transaction information to anyone outside the proper process – that is to say when we are able to deliver the votes directly to the tabulator through our own encrypted data channels. What we can’t be certain about, however, are those situations where custodian banks force us to use the voting intermediary of their choice and deny us the ability to send votes directly to the local market.
The uncertainty in the voting chain is compounded by the unecessary padding on foreign vote deadlines which investors are subjected to. We’ve probably all sat and wondered why, in a T+2 trading environment, votes are still being called in by the custodian voting service provider up to 15 days in advance of the actual vote deadline. Well, perhaps that padding provides an opportunity for the warehoused data to be used for other purposes – like resale. “Impossible,” you might think, “no-one would be reselling our data! Would they?” Well yes, it seems they would.
Late last week, Manifest was informed of a situation where voting inefficiencies were being monetised when an ex-UK issuer was asked if they would like to buy a feed of advanced vote intentions. Yes, that’s right, they were asked if they would like to buy a feed of the votes they were fully entitled to receive and would have received in due course once the grindingly slow chain of intermediaries had done its thing, only by paying for the voting equivalent of “priority boarding” they could see the data earlier.
Why would a company be willing to buy its own vote queue from a 3rd party you might ask? From a purely economic perspective it was probably a rational decision if it was cheaper than using a proxy solicitor to guage market sentiment. Good proxy solicitation is a labour intensive process and not all investors particularly enjoy being on the receiving end. However it does afford the market an assurance of informed consent from shareholders – that is to say they have at least been asked if they would be willing to share their views ahead of time.
A quick straw poll on a Friday afternoon with leading institutional investors revealed that none of the ones we spoke to had ever been asked about voting confidentiality or data protection issues by their custodian. Furthermore, they were not at all clear about the chain of accountability in the voting process.
Global voting processes are a mess and an unnecessary mess too. The SEC is rightly investigating the effects of service provider dominance in this space and have clearly articulated a view that Manifest has held for a long time: barriers to competition in the proxy space are barriers to innovation and service quality. Proxy voting is seen in many parts of the financial services industry as an irritating distraction from the business of making maximum profits from trading activities, hence the emphasis on voting being as cheap as possible, if not free. But just as there is not such thing as a 50p flight, the price being paid for cheap voting may be greater than you imagine if votes are being sold to the highest bidder without your knowledge. (Apologies to readers whose firewalls prohibit YouTube in the office, but we do recommend this musical fable illustrating the perils of “cheap”.)
Vote tapping is a way of tapping into market sentiment. Would we permit any market participant to tap into trades prior to settlement and appearance on the vote register? Probably not. What would happen in a heated proxy battle? Could anyone buy the votes and bet in the market against the outcome? As things stand we just don’t know because of the complete lack of transparency about voting confidentiality.
So what can be done to protect your voting confidentiality? Being biased we would say use a proxy voting agency that only works for investors and is not conflicted by taking money from issuers or intermediaries. Blatant advert aside, we think that all investors should be asking their custodians about data confidentiality throughout the entire voting process. Secondly, they should be getting iron-clad guarantees that their votes will never be resold, either in aggregate or individually, without their express consent.
Issuers, it might be tempting to save on proxy solicitation fees by buying an advance vote data stream, but in our view, all this is doing is perpetuating the vast inefficiencies in the cross border voting market. After all, why would anyone invest money to improve a broken system when the broken model affords multiple opportunities to seek monopoly rents instead?