With stewardship more important than ever and digital technology to the fore, surely it is time to solve the problem of proxy voting? Nicholas Pratt investigates.
The inefficiencies around shareholder communications and proxy voting are one of the biggest sources of frustration for investors. For years they have been told that it is not always possible to tell if their vote was even cast, let alone if it was counted.
It is equally maddening for issuers who are unable to accurately identify their shareholder base or understand their voting intentions on important corporate issues and actions.
The excuses given by the various service providers have centred on the complexity of the process – the numerous intermediaries in the transaction chain, the difficulty of separating entities in a pooled or omnibus fund, or the lack of technology solutions. However, in the past 18 months two of the most notable trends affecting the corporate world have been the use of digital technology and communication tools and the rise in importance of stewardship and engagement.
Furthermore, there are services out there that purport to offer a solution, from the likes of funds platform AMX, fintech Broadridge, former Citi start-up Proxymity, and investor services group Institutional Shareholder Services (ISS).
And there is now a regulatory imperative thanks to the Shareholder Rights Directive II, which was introduced by the European Commission in 2017 and came into effect in September 2020. So, surely there has never been a better time to solve these issues once and for all.
The UK pension industry’s Association of Member Nominated Trustees (AMNT) set out its view of the challenges around proxy voting in its 2020 report ‘Bringing shareholder voting into the 21st century’. The report was welcomed by the UK’s pensions minister Guy Opperman, who endorsed the report’s recommendations and agreed to set up a working group, stating that he was “determined to bring about real change on the issue”.
The main conclusion from the report was that long-term underinvestment in the voting chain has left it unfit for purpose and fund managers have not shown enough will to correct things. “Many have said that if they were starting from scratch, they would not start here,” says AMNT chair Janice Turner. “But if there was a greater will to improve the service to the end investors, it could have been improved.”
Technical issues have been cited as a reason why fund managers are reluctant to allow investors in pooled funds to direct how their holdings should be voted, says Turner. “Others are pointing to the complex investment structure – pooled fund investors purchasing units rather than directly investing.”
This structure has also been cited as a reason why fund managers will continue to ignore their investors’ voting policies, says Turner. “But trustees query how it is that the correct returns can be paid on an investment, which necessitates distinguishing each individual investor’s holdings in a fund, while also being told that it’s too difficult to do the same in relation to votes.”
Turner notes that fund managers have other arguments for refusing to accept trustee voting policies in pooled funds. For example, that they have greater expertise, so trustees should leave it to them; or that they vote all their shares the same way so that they speak with a strong voice. But, she says, “there’s no point speaking with a strong voice if they are saying the wrong thing”.
Furthermore, this notion goes against recent regulatory developments, supported by AMNT, which require pension funds and other asset owners to take more responsibility for their stewardship. As of October 2019, trustees have been required to produce a Statement of Investment Principles (SIP) which sets out their stance on ESG issues like climate change. Consequently, they will no longer be able to simply state that they have delegated stewardship to their fund managers.
“There has to be the willingness of fund managers to accept that their clients – pension scheme trustees – should be able to adopt a voting policy and have the fund managers follow it on a comply-or-explain basis,” says Turner. “The government, the regulators, trustees and the public all expect pension scheme trustees to be active stewards of the assets they invest on behalf of their beneficiaries, but the current reality makes it very difficult for trustees to do so.”
In addition to the lack of willingness among fund managers to enact their investors’ intentions, she also believes there is a role for technology. “Proper investment in updating the voting system would assist. It could, for example, ensure vote confirmation; it could remove the problem of intermediaries being unable to identify the number of shares or units held by each end-investor at any given time; it could speed up data transfer.”
Turner praises the recent launch of a new pooled funds service from AMX that gives the investors a choice of voting policy, including both the AMNT’s ‘red line’ voting policy and the Pensions and Lifetime Savings Association’s voting policy. The service was launched in February 2021 in partnership with asset manager DWS, asset servicer Northern Trust and Minerva Analytics.
Cancelling out the vote
According to Stuart Sergeant, director of business development at AMX, asset managers are not geared to aggregate the voting preferences of multiple clients within pooled vehicles, nor have they demonstrated the flexibility to offer independent stewardship overlays for their pooled funds.
“The challenge is to increase the ability for investors to express their voting preference more easily, but in segregated accounts or pooled funds,” says Sergeant. “Also, investors need access to more standardised reporting of voting and systems to allow them to see aggregate reports of how their managers voted. This would enable them, for example, to see if two of their managers voted differently on the same resolution, thus ‘cancelling out’ the investors’ vote.”
Fortunately there are products on the market designed to add some efficiency to the process. One of these is Proxymity, which was born in 2016 through Citi’s accelerator programme Citi Ventures. Since then, the platform has signed up a number of custodians, asset managers and advisory services. It was also spun out of Citi in 2020.
The project was designed to provide an electronic platform to receive information directly from issuers rather than via all the intermediaries. This would give investors and issuers more transparency and also more time. “In the UK, the issuer would typically receive a load of votes 24 hours before the event,” says co-founder and CEO Dean Little. “It was a big mess that just goes into the system.”
By using Proxymity, issuers would get votes two weeks prior to the event, which gives them much more time to engage with shareholders, says Little. “The issuer is then in control of the process if it goes via our platform, rather than sending it into the ecosystem via a gazette or some other paper form.”
The platform also tries to address the frustrations at the other end of the processing chain – the investors – by making it possible to know if their votes were cast and how they were cast. “We take a position with custodians to create a digital pathway to the end investor,” says Little. “The platform also has to be interoperable with the various agents and advisory services that are used, such as ISS and Glass Lewis, which are indispensable to both issuers and investors.”
Proxymity is not looking to remove any of the numerous intermediaries on the proxy voting chain, says Little. “It is free for issuers to use the platform and the intermediaries pay to use the platform but don’t need to handle the data directly.
“Our platform works but it needs more adoption,” he adds. “We have taken a huge step forward but the problem is not solved – we need to bring more people on to the platform and expand our geographic footprint. We also need to develop a product for virtual meetings, which have become massively more popular since Covid.”
The timing of the pandemic and the September 2020 deadline for intermediary compliance with SRDII resulted in a delay for many intermediaries in the implementation or development of updated proxy voting solutions, says Rudi Kuntz, managing director, head of global proxy distribution at ISS.
“While many intermediaries across markets are starting to align in relation to standards and interpretation of the Directive, the timing of the pandemic represented an immediate additional challenge which, for many, meant their ability to focus on proxy voting solutions and the deadline of SRDII was adversely impacted,” he explains.
In terms of digitisation, the pandemic did have an unexpected effect on proxy voting. There were many challenges for intermediaries and providers to continue to service their clients during unprecedented circumstances.
“Due to global lockdowns throughout 2020, many shareholder meetings were postponed and re-announced at later dates,” says Kuntz. “This resulted in a much larger volume of initial notifications, amendments and new notifications being sent throughout the chain than typically expected.
“The larger volumes and constant change in meeting dates and deadlines resulted in added complexity across markets and through the chain. However, due to the fact most shareholder meetings could not occur in person, many companies offered virtual meetings for shareholders to participate without physical attendance. While this may not have removed challenges within the intermediary chain, investors were able to participate in meetings that otherwise may not have been offered virtually.”
What else can be done to make the voting process more efficient? “Greater alignment across markets and the intermediary chain are needed to ensure increased transparency and efficiency,” says Kuntz.
“Even though the volume of intermediaries offering voting services to investors is growing and the ability to receive vote confirmation in certain markets now exists, there are many issuers and participants within the intermediary chain who are still in the process of aligning standards and practices with their own interpretation of the directive.”
There needs to be reconciliation between the spirit of SRDII and the practical implementation, says Demi Derem, general manager, investor communications solutions international, Broadridge. “The oversight from asset owners has intensified over recent years. As a result of SRD II, asset owners expect more data, information and transparency from their asset managers, but that has a knock-on effect,” he says. “The asset manager tells their asset servicing agent to go and get that information, but that is not always possible. The information is either not there or not being supplied by the chain of intermediaries. The devil is in the detail.”
One of the problems is the different definitions of a shareholder. In the UK, this is recognised as the registered holder, many of which are custodian, whereas in the EU, it is defined as a beneficial owner. This is a particular problem for firms with a global investor base.
The complexity stems from the sheer number of intermediaries in the chain, says Derem. “They all have a role and if you try to cut them out, there could be local market legal and/or client contractual issues. We have tried to make the chain more harmonised but not everyone is ready at the same time.”
A Securities Market Practice Group (SMPG) body looks at standards and best practice to create interoperability up and down the chain. For example, SRD II dictated the requirement for machine-readable electronic issuer messages that facilitate straight-through processing; however, it did not specify exactly what electronic message type should be used.
“Whilst the SMPG has been pushing for the adoption of the SRD II-compliant 20022 message type, unfortunately not everyone has been able to embrace the standard – some are using ISO20022 and some are still on the old ISO15022 standard,” says Derem. “And there is lead time to updating standards – it can’t be done overnight. Things have changed in that regulations and best practice have focused on this more, but a technology catch-up process is underway and that could take a number of years to be completed.”
In the meantime, an update of the SRD is likely that will hopefully address some of the grey areas in the process and expose gaps in compliance.
Technology and regulation aside, there is one more obstacle that needs to be overcome – the obstinacy of the officials that have worked in this highly regulated field and are wary of any change to the process. Even though the use of digital platforms is fully legal, there is often an insistence on paper processes. As Little says: “Just because it has always been done that way, it is no reason not to change it.”
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