Brian Bollen looks at why some elements of the proxy voting process belong in the last century and why COVID-19 and ESG have both had a significant part to play in its modernisation
The irresistible rise of proxy voting as a focus of investment has become a feature of the financial services landscape in recent times, after what has arguably been a period of some neglect as the world struggled to cope with more immediately pressing issues.
Gary O’Brien, global head of banks and brokers segment strategy at BNP Paribas Securities Services, says: “In my experience, proxy voting is the part of our markets that is yet to evolve into the 21st century. The integration of standards and electronic processing that we see in other areas vastly outweighs what we see in proxy voting. But the good news is that this issue has been acknowledged and participants are focused on resolving it.”
He is, of course, not alone. “The intermediation step-by-step process from issuer to custodian to investor and back again is cumbersome, slow and prone to error,” states Michael Kempe, head of business development at Proxymity, one of the newest kids on the block at less than two years old and already a recognised and respected name. “Proxymity was born out of that state of affairs, with the aim, and now proven success, of directly connecting all the elements in the process.”
For Rudi Kuntz, managing director, head of global proxy distribution at ISS, one of the largest challenges faced by intermediaries and investors globally has been transparency through the proxy voting chain, specifically the transparency of vote confirmation from issuer to intermediary to investor.
“The tendency of institutional investors to actively vote a high volume of shareholder meetings for companies within their investment portfolio has increased in recent years,” says Kuntz. “This increase in the importance and frequency of active voting has carried with it the need from investors to confirm that their vote counted at the shareholder meeting. Given the various parties involved in the chain and the differences in how investor shares and accounts may be structured by each party, confirmation of successful vote processing to the underlying investor has proven challenging.”
There is broad agreement in the industry that the pace and range of investment is certain to grow, in a process aided and abetted by the impact of COVID-19. This has, among other things, accelerated the use of remote communication and made it easier for shareholders of all shapes and sizes to attend annual general meetings.
There is also a strong belief in at least some quarters that the industry is on the verge of a bout of renewal. “The need to develop and enhance proxy voting services can be seen across the industry and around the world, and we will see more new players coming onto the field,” says Thilo Derenbach, head of European custody products at Clearstream.
When asked for thoughts on market events of recent times, Francisco Béjar, deputy head of BME’s central securities depositary, Iberclear, began by noting that on 3 September 2018, the European Commission published the implementing regulation regarding the Shareholder Rights Directive II (SRD II).
This directive had the aim of encouraging shareholder engagement and improving the transparency of related processes, including proxy voting. The regulatory changes require intermediaries to provide electronic proxy voting capabilities to investors. This suggests new platforms and technologies may not only help upgrade the existing processes to meet the SRD II demands, but could also be the most efficient and effective means of complying with them.
The clear implication is that this is inherently a good thing. “We see the benefits of digitally connected platforms every day and find it surprising that the industry still relies on analogue and paper-based processes,” Béjar says. “These existing processes bring with them unnecessary expense and inefficiency due to the amount of manual handling involved, as well as the risks, such as the opacity that is inherent to the system and the low commitment to environmental sustainability.
“There are highly consolidated specialised providers with extensive experience in this type of service that offer voting management services to intermediaries and therefore to shareholders. Central securities depositories, in their desire to expand their service offerings, are beginning to offer services in this area, taking advantage of the implementation of SRD II,” Béjar adds.
BME, through its central securities depository, launched a new digital proxy voting service for shareholders’ meetings on 7 February. Powered by the Proxymity investor communications platform, this is a sustainable solution that connects participant entities and issuers in a direct, centralised way to speed up and promote the efficiency of the voting process at shareholders’ meetings.
Béjar says the agreement combines Proxymity’s experience in the field of proxy voting with the neutrality that a market infrastructure offers to the process and makes it easier for issuers and intermediaries to exchange information through existing communication channels.
For BME it was very important to have the service deployed before the start of the 2022 voting season, offering an alternative for issuers and participants for this period, Béjar adds.
COVID-19 and ESG
Kalkine Group, an independent equity research and media firm that is an established name in Australia, New Zealand, and the UK recently started operations in Canada and US. CEO Kunal Sawhney puts the proxy voting issue under the microscope, starting by underlining some basic facts in line. “Owning shares is owning the company, and hence it is prudent to be a part of decisions being made by the company,” he says.
Proxy voting allows a shareholder to impact a company’s important decisions and operations. In the current scenario, the way public companies are governed has seen a significant change from what it was a few years back. To govern properly, equal participation of shareholders is required to pass different resolutions that may not be limited to pay and perks of the top executives, and can also include environmental, social, and governance (ESG) concerns.
The COVID-19 pandemic has not only changed the way people live but also the way they invest and see their investment. It has led people to think more about their investment objective and about corporate governance, which would impact the long-term objectives of the company as well as the overall economy and consequently the return for shareholders.
“At a time when most of the work is moving to digital from physical, with the industry moving towards real-time online investor communications, proxy voting has become a more relevant tool to exercise ownership responsibilities,” Kalkine Group’s Sawhney says.
There is even an argument, according to David Chase Lopes, managing director, Europe, Middle East and Africa, at DF King Ltd, part of Link Group, for enabling shareholders to sell their voting rights, in the same way that they can sell their entitlement in a capital-raising rights issue. “This could be achieved by repurposing current and emerging technology,” he states. But that is literally another story.
Kalkine Group’s Sawhney points out that many companies have tested virtual shareholder meetings over the last couple of years, the disruption seen during that period having made proxy voting a necessity.
During the pandemic, several climate-related resolutions, reflecting concerns about carbon footprint and the need to design emission-reduction strategies, have been voted on at many companies and the trend is likely to continue as the ESG priority for investors continues to gain prominence.
“The trend is also gaining support from larger institutions like BlackRock, helping the rise and passing of climate-related proposals,” Sawhney says.
“Low voting percentages and embarrassing votes are something that any serious corporate management team would like to avoid, as both impact the governance credibility and damage the reputation. Hence it is considered crucial to corporates and their directors to pay attention to the outcome of the vote that could impact future decisions. And activist investors are playing a major role nowadays in influencing corporate decisions.”
In most companies, the shareholding pattern is dominated by institutional investors, who hold a considerable stake and enjoy a strong influence in corporate decisions. At the same time, there are related factors that need to be taken care of before exercising their influence, like finance and regulation.
These factors have led to the emergence of professional proxy advisory firms that work on researching company-specific issues and accordingly developing guidelines for proxy voting. Institutional investors have become concerned about the need to properly put their weight behind corporate decisions in the changed scenario, which has driven a growing demand for these firms and their services.
“As there is a shift towards digital communication and broader investor participation, the trend is likely to gain momentum and there could be more such developments ahead as they help to increase overall productivity,” Sawhney affirms.
“Nowadays, when institutional investors announce their decisions ahead of voting, individual shareholders are able to gauge where they stand on different issues and how their voting can make an impact. In the recent past, unprecedented opposition from investors has been seen on a number of issues, providing insight for the industry to be prepared for the sound corporate governance mechanism. In the UK, the proxy voting chain is a complex structure with a chain of intermediaries between the corporate and investors. The industry is looking to proactively manage the chain amid shareholder activism and the growing interest in exercising voting rights.
“We are following the trend, moving towards a more transparent process from the existing opaque one, keeping in mind the renewed urgency on ESG considerations,” Sawhney concludes.
