The real issues with proxy voting
Stuart Crosby, President and CEO, Computershare Limited
If, as is sometimes claimed, millions of proxy votes go astray in Australian shareholder meetings each year, surely the share registrars, as the final counters of the votes, are to blame.
If only the situation was so simple and a bit of back-office discipline in the registries could solve the problem. Unfortunately, the issues are very complex and involve many parties. What is needed is an informed and constructive discussion of the underlying issues – most of which stem from the complexity of beneficial ownership structures and the separation of legal and beneficial ownership. I hope this article sets a framework for such a discussion.
Proxy voting problems were highlighted in AMP Capital Investors’ 2006 Report (Corporate Governance: Why bother?) which found “many instances where the ‘Results of Meeting’ reported by companies to the ASX contained less ‘against’ or ‘abstention’ votes than AMP Capital alone lodged.”
That votes go missing is not in dispute. Institutional votes are lost during their passage through the complex chain of ownership and the bevy of different service providers that administer the affairs of institutional investors. The question is, where, how and why do these votes go missing?
As I mentioned earlier, to find an answer to this question, we first have to look at the important distinction between legal and beneficial ownership.
Share registrars record the legal ownership of their clients’ securities. For securities held by investment institutions, this will typically be a custodian. For present purposes, it is vital to recognise that only the legal owner has the right to vote and the only votes that the registrar can properly recognise are those cast by the legal owner.
All the links in the ownership chain behind the custodian’s presence on an issuer’s share register establish beneficial ownership, not legal ownership. Unlike legal ownership, which is unique (one share can only have one legal owner), beneficial ownership can be complex, involving multiple layers of contractual claims. For instance, a custodian’s shareholding on an Australian register will typically represent a range of the custodian’s clients. Some of these clients will be local institutions, some will be regional sub-custodians (holding on behalf of global custodians), and some may be global custodians themselves. The global custodians in turn will be holding on behalf of investment funds. These will in turn be investing on behalf of institutional or retail clients.
As if it wasn’t already complicated enough, another intermediary group has developed in recent times - specialist firms that provide advice and recommendations about how institutions should vote at shareholder meetings; some of these firms look to reinforce their commercial relationships with their institutional and custodian customers by offering vote lodgment services.
The rights and responsibilities regarding the voting of shares legally owned by custodians on their clients’ behalf can sit many layers of beneficial ownership below the Australian custodian that is the legal owner. Passing required information (notices of meeting / explanatory memoranda, etc.) from the legal owner out to the voting decision-maker can be complex, messy and error prone; passing voting instructions back to the legal owner custodian is similarly fraught. It is important to note that share registrars are not involved in the transmission of information flows or voting intentions between the beneficial owners of shares, voting agents, global custodians, regional sub-custodians or local custodians; the latter usually being the legal owner and the only party recognised by the law and authorised to vote the shares.
The complexity of this situation is again compounded by the frequently changing share balances of the legal owner custodian’s holdings. As I said earlier, a legal owner custodian will usually have a single holding that represents a range of beneficial owners, each of whom may on any day buy or sell. As purchases and sales are settled, and stock loans made or returned, the size of the legal owner custodian’s holding on the register will change. It is here that the voting challenges are most acute. Some beneficial owners vote for and some vote against a company resolution. If the aggregate balance of the pooled holding on the register falls below the number of shares voted by the legal owner custodian, which beneficial holder’s vote fails? (The answer to whose vote fails is that they will all fail if a legal owner has lodged a proxy that represents more than its total holding.) These serious complexities regularly require custodians (often with the share registry’s assistance) to issue replacement proxies.
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