November 2013

PROXY VOTING: Where to mark your X

MeetingLacking regulatory focus and investment, the proxy voting system is riddled with difficulties, finds Nicholas Pratt.

Proxy voting is problematic. Asset owners and fund managers complain that inefficiency and a lack of transparency mean they are often unable to tell if their votes made it to the relevant meeting, and are even less likely to receive a confirmation that their instructions were carried out correctly.

At the other end of the chain, issuing companies typically find it impossible to match the flood of proxy votes they receive with individual shareholders.

Meanwhile, in the middle there are a host of competing intermediaries often adding complexity to the process.

On the positive side, technology continues to offer ways forward but for every solution there is a problem. For example, one suggestion is to assign a unique identifier to every shareholder and their vote, thereby making it easier to track that vote’s progress. However, the use of omnibus accounts by custodians or pooled fund structures by investors makes it difficult for issuers to identify the end investors, says Peter Swabey, policy and research director at the Institute of Chartered Secretaries and Administrators.

“The companies want to ensure that it has the support of its investors and is engaging with them but so many of the votes are received as part of a pooled account. Within that pool, there may be 20 million votes for, five million against and five million abstentions but the company has no simple and foolproof way of who is who and how they voted. The underlying investor has no option but to take the word of their proxy agent, which is probably not the purpose of their seeking confirmation.”

Cas Sydorowitz is the chief executive, corporate advisory for Georgeson, a company which helps issuers to identify their investors and to illicit a voting response from them. Sydorowitz is also in regular contact with investors and there is a similar level of frustration at the lack of transparency and efficiency in the process.

One problem is the relative level of regulatory scrutiny towards banks’ processing of proxy voting compared to the scrutiny applied to other activities, such as trading. “No regulator has direct responsibility for proxy voting so it tends to fall between the cracks.”

There is also a commercial aspect to the perceived neglect of proxy voting that typically centres on the custodians. “Investors already pay their custodians for various elements of proxy voting. But whereas the custodians have invested in their internal systems for trade execution, settlement and collateral management, the same investment has not been made in proxy voting systems,” says Sydorowitz.

FUNCTIONALITY
Another possible solution is the use of one electronic voting service that takes the vote from the investor to the registrar in a fully automated and straight-through way.

One service in the UK that is increasingly used is provided by Crest; however, there is currently no functionality in place for the voting agents acting on behalf of the issuers to give electronic voting confirmations after the meeting.

“That functionality could be developed but someone would need to pay for that,” says Swabey. “There needs to be a business case made for further change and I struggle to see
that happening.”

In addition to Crest, there are also proxy voting agents that offer an automated voting service from end-to-end but find this concept difficult to implement when there are so many other intermediaries in the chain, says Paul Hewitt, business development director at Manifest. “As it stands, an investor might employ Manifest but then that vote will go through a custodian which will have also appointed a proxy voting agent so there are already three parties in the chain before the vote goes to the issuer or registrar.

“We have always maintained that there is nothing in securities law that says custodians have to be used in the proxy voting process,” he says. “The investors are the ones that feel the inconvenience the most but they have not been able to do much about it.”

PILOT SCHEME
Proxy voting agent Broadridge says that progress has been made on establishing end-to-end vote confirmation and Patricia Rosch, president of Broadridge’s international Investor Communication Solutions business, cites a recent pilot scheme that was conducted in Spain with share registrar Santander Investment, six global and sub custodians and three issuers.

Broadridge is now looking to extend the pilot to include more issuers and also end investors in the pilot so that Broadridge can send vote confirmations directly to investors, says Rosch.

“At the moment it is only Broadridge that has this capability but if the registrars invest in this capability, they will be able to provide the vote confirmation through any vote service provider to the fund managers.”

One of the complications in extending this pilot, aside from addressing registrars issue over the quality of the proxy votes they receive, is the diversity in proxy voting practice, rules and regulation in each country, making it hard if not impossible to build a global model that can be used across multiple markets.

“I think it is inevitable that changes will mostly happen at a national level and that is frustrating if every market is doing something different,” says Les Turner, product manager at proxy voting agent ISS.

“To harmonise all the different voting rules in different markets would be unrealistic but if we could just standardise the messaging, that would be something.”

Fortunately, there is a messaging standard out there – the ISO20022 standard message format designed specifically for proxy voting and including a mechanism for post meeting vote confirmation. Unfortunately this standard has been available since 2007 and has still not been widely adopted by the market, custodians especially, says Turner.

“It is a question of priorities. The custodians are facing a lot of regulatory change and proxy voting is not a core area for them. They tend not to make money from it so it is hard to make a business case.”

Justin Chapman, global head of industry management at Northern Trust defends the custodians’ role in the proxy voting process by saying that the challenge to achieving transparency resides ultimately with the issuers and the investors.

“We can report to our client and their managers what gets voted, the problem is that there is no ability to provide confirmations at the end of the chain. We and our agents, providers have invested in the technology. In the UK, custodians and some investment managers have even offered to help with the investment for issuing agents to implement the technology so I don’t think there is much more we can do.”

FULL DISCLOSURE
When issuers respond that the proxy voting information they receive from custodians via their proxy voting agencies is largely worthless because they arrive as part of a pooled account and cannot be linked back to individual shareholders, Chapman says that this is more a result of investors wishing not to disclose their identity rather than custodians wanting to save money by insisting on pooled accounts.

“We can provide that transparency and identify individual investors within an omnibus account but it depends ultimately on whether the investor wants to provide full disclosure.

“Ultimately, it is up to issuers and investors to get together and decide if they are willing to meet the respective issuer request for disclosure of voting identity on one side and automated confirmations on the other. If they want to move forward, we’ll be there to help.”

©2013 funds europe