An evolving space
31 Mar 2021
With the influence of the pandemic and also SRD II, experts agree that the adoption of technology in the proxy voting process for annual general meetings has accelerated by several years
Image: dataan/stock.adobe.com
Prompted by the disruptive pandemic, proxy voting and the approach to it has changed dramatically in a short space of time. Prior to 2020 proxy voting was dubbed as a ‘largely manual’ and ‘outdated’ process for many jurisdictions. The role that proxy voting plays in asset servicing is an important one. It involves a member of a decision-making body delegating their voting power to a representative to enable a vote in absence. Companies hold annual general meetings (AGMs) with shareholders to review their performance over the last year, but if the shareholders are unable to make it then they can pass their vote through their banks and custodians who vote by proxy on their behalf.
The covid restrictions meant that for many countries around the world, large gatherings were unable to take place causing a lot of markets to change their approach to issuing annual meetings for the first time. Where a physical meeting was previously the only option, experts identify that virtual shareholder meetings (VSM) became the norm, which bolstered the demand for VSM technologies, leading many registrars to rethink their VSM delivery products and services.
“The pandemic has been a catalyst for the adoption of digital solutions in proxy. In markets where physical meetings, wet signatures and manual voting cards were still a requirement, these processes were re-engineered through the collaboration of market participants, national authorities and regulators to allow investors to continue to exercise their corporate governance rights,” says Demi Derem, head of international bank broker-dealer communication solutions, Broadridge.
A change in approach
Most jurisdictions provided relief by allowing postponement/ adjournment due to the outbreak of coronavirus but some jurisdictions passed necessary acts and laws to allow fully virtual annual general meetings.
For example:
UK: A temporary provision introduced in June 2020 to Corporate Insolvency and Governance Act 2020, allows virtual AGMs till March 2021
Germany: Relief provided under COVID-19 Mitigation Act (CMA) to allow virtual shareholder meetings; has been allowed in 2021 as well
Austria: COVID-19 GesV, passed in April 2020, allowed virtual AGMs; model extended to 2021
Switzerland: COVID-19 Regulation 3 brought in June 2020 to allow virtual shareholder meetings, has now been extended to December 2021
Malta: Legal notice 288 of 2020 states AGMs/EGMs may be held virtually
US: Generally allowed to hold either hybrid or virtual-only meetings
IHS Markit’s director, product management, Charu Kirti Jain says: “A large number of countries have also adopted partial virtual means that allow online delivery of AGM notice and materials like annual reports, director’s profile, audited financial statements as well as webcasting/online conferencing of the AGM proceedings.”
Additionally, Jain observes there was an increased regulatory push to address certain transparency issues in the proxy voting processes. As well as reviewing performance, AGMs look into executive compensation, dividend proposals and significant investment decisions, and the ever-increasing hot topic of environmental, social and governance (ESG) and the risks related to it.
The recently launched Shareholders Rights Directive II (SRD II), implementation in the European Union in September 2020, aims to bring standardisation and automation in shareholder identification and proxy voting communication processes throughout EU member states
“In the US, adoption of amendments to 17 CFR 240 by Securities and Exchange Commission (SEC) in November 2020, focused on changes around rules governing proxy advisory and proxy solicitation. This was done to ensure that the investors receive accurate and complete information in a transparent way from the proxy advisory firms in order to enable them take more informed voting decisions,” says Jain.
Developments in technology
The pandemic has forced the industry to look at their current processes especially in light of the updated EU SRD II. Experts agree that the pandemic definitely sped up the adoption of technology and electronic means in the proxy voting process for AGMs by several years. The outbreak forced companies to put in contingency measures to minimise the disruption to their AGMs. Experts say these companies were supported by local regulatory authorities that passed necessary acts/laws to allow fully virtual AGMs. Some of these laws are applicable for the 2021 proxy season as well.
Jain observes that online delivery of AGM notice and materials like annual reports, director’s profile et al; was adopted by many companies where legislative requirements either allowed or provided waivers for such mechanisms.
“By using technology to stream audio, video and presentations, to authenticate online attendees, receive questions, collection of votes, tabulation and declaration of results; several logistics for holding a physical meeting were not required,” comments Jain.
SRD II in particular drove the requirement to speed up traditional processes, which meant the better utilisation of digital technologies – real-time processing and transparency across the chain of intermediaries being the biggest themes and objectives for many, according to Broadridge’s Derem.
Looking at investor communications horizon, in early 2020 Broadridge took the conscious decision to not only update its current technology and platforms to be SRD II compliant but also to re-platform its various institutional- and retail-based proxy solutions under a new digitally-enabled, cloud- based infrastructure.
While Jain agrees there were certain regulatory measures like SRD II that were pushing these proxy voting processes towards standardisation and digitisation, he suggests COVID-19 accelerated the technology adoption for processes.
This includes processes like shareholder identification, meetings announcement digitisation and communication, shareholder interactions and voting procedures to bring in cost efficiencies and address increasing customer demand for online services due to remote working.
Challenges
Although SRD II has acted as a catalyst for change in speeding up processes in proxy voting, it has not come without its challenges.
SRD II was rolled out as a directive rather than a regulation allowing each member state to transpose local compliance as they saw fit.
Derem explains that in many cases, transposition included subtle differences and often additional requirements for both issuers and intermediaries. As a consequence, a number of interpretation and market practice issues occurred, particularly around messaging between counterparties, which are still being addressed.
“Key legal definitions, especially what constitutes a shareholder, added additional complexities for intermediaries reengineering their operating models to be SRD II compliant,” affirms Derem.
Meanwhile, the EU is set to review implementation challenges in 2022/23, and Derem says many market participants are now starting to refer to as the start of SRD III. Further challenges within the proxy voting space include the execution of voting rights where the rights holders have no financial interest in the companies.
For many markets, the rights to vote are determined by the record date holdings and these markets have a significant timespan between the record date and the meeting date.
Jain explains: “As a result, the trades happening between this period transfer the financial interests in the companies to the new buyers, effectively the new beneficial owners; however, the voting rights remain with the sellers because they held shares as of the record date.“
“Similarly, there could be funds that hold large quantities of shares in a company and hedging against these positions with put options; effectively having a zero or many times negative financial interest. A joint effort would be needed from the custodians and the financial intermediaries to put volumes of such empty votes in statistical context before addressing them.”
An evolving space
While investment strategy and the ability to hold securities globally have evolved, do processing for meetings still remain largely manual. However, Broadridge’s Derem says there are some common misconceptions, and it can be confusing — unless you are familiar with the process, it is easy to get lost.
Through the widespread industry usage of Broadridge-related proxy infrastructure and solutions, proxy over the last decade or so has benefited from extremely high levels of straight-through processing.
Nonetheless, Derem cites that some restrictive market nuances and local and national laws remain which have limited the full adoption of digital solutions.
He comments: “Downstream ancillary services provided by custodians such as lending, triparty collateral and sanction screening have also created complexities in the adoption of full end-to-end automation. Due to the pandemic and SRD II, the industry in certain ways has been forced to relook at its traditional operating models and replace certain manual processes with automation or digital communications. Whilst some of these electronic processes were introduced as emergency measures by local regulators and authorities, we are hopeful that some of these will become a more permanent fixture.”
Looking to the future, Broadridge expects to see further global initiatives and focus on corporate governance and ESG as national authorities and regulators look to continue the momentum.
Jain predicts that the key element that IHS Markit sees metamorphosing over the coming years in this digital age is “the trust” that is bound to change form from physical entities to secure digital records.
As digital technologies evolve to replace human trust in institutions like governments, companies, banks, lawyers etc., their adoption in the proxy voting space is inevitable, according to Jain. A number of consortium-based distributed ledger technology proofs-of-concept are being explored by many industry players for application in proxy voting space.
Jain muses: “Whether it is the establishment of ownership of securities and linking of voting rights with those or about the collection of voting instructions and improves vote execution transparency or it is about the transfer of voting rights to corresponding proxies; the possibilities in this space are all trust-based and can be addressed by distributed ledger-based technologies. So, this is another trend that we see gaining strength over the coming years.”
The covid restrictions meant that for many countries around the world, large gatherings were unable to take place causing a lot of markets to change their approach to issuing annual meetings for the first time. Where a physical meeting was previously the only option, experts identify that virtual shareholder meetings (VSM) became the norm, which bolstered the demand for VSM technologies, leading many registrars to rethink their VSM delivery products and services.
“The pandemic has been a catalyst for the adoption of digital solutions in proxy. In markets where physical meetings, wet signatures and manual voting cards were still a requirement, these processes were re-engineered through the collaboration of market participants, national authorities and regulators to allow investors to continue to exercise their corporate governance rights,” says Demi Derem, head of international bank broker-dealer communication solutions, Broadridge.
A change in approach
Most jurisdictions provided relief by allowing postponement/ adjournment due to the outbreak of coronavirus but some jurisdictions passed necessary acts and laws to allow fully virtual annual general meetings.
For example:
UK: A temporary provision introduced in June 2020 to Corporate Insolvency and Governance Act 2020, allows virtual AGMs till March 2021
Germany: Relief provided under COVID-19 Mitigation Act (CMA) to allow virtual shareholder meetings; has been allowed in 2021 as well
Austria: COVID-19 GesV, passed in April 2020, allowed virtual AGMs; model extended to 2021
Switzerland: COVID-19 Regulation 3 brought in June 2020 to allow virtual shareholder meetings, has now been extended to December 2021
Malta: Legal notice 288 of 2020 states AGMs/EGMs may be held virtually
US: Generally allowed to hold either hybrid or virtual-only meetings
IHS Markit’s director, product management, Charu Kirti Jain says: “A large number of countries have also adopted partial virtual means that allow online delivery of AGM notice and materials like annual reports, director’s profile, audited financial statements as well as webcasting/online conferencing of the AGM proceedings.”
Additionally, Jain observes there was an increased regulatory push to address certain transparency issues in the proxy voting processes. As well as reviewing performance, AGMs look into executive compensation, dividend proposals and significant investment decisions, and the ever-increasing hot topic of environmental, social and governance (ESG) and the risks related to it.
The recently launched Shareholders Rights Directive II (SRD II), implementation in the European Union in September 2020, aims to bring standardisation and automation in shareholder identification and proxy voting communication processes throughout EU member states
“In the US, adoption of amendments to 17 CFR 240 by Securities and Exchange Commission (SEC) in November 2020, focused on changes around rules governing proxy advisory and proxy solicitation. This was done to ensure that the investors receive accurate and complete information in a transparent way from the proxy advisory firms in order to enable them take more informed voting decisions,” says Jain.
Developments in technology
The pandemic has forced the industry to look at their current processes especially in light of the updated EU SRD II. Experts agree that the pandemic definitely sped up the adoption of technology and electronic means in the proxy voting process for AGMs by several years. The outbreak forced companies to put in contingency measures to minimise the disruption to their AGMs. Experts say these companies were supported by local regulatory authorities that passed necessary acts/laws to allow fully virtual AGMs. Some of these laws are applicable for the 2021 proxy season as well.
Jain observes that online delivery of AGM notice and materials like annual reports, director’s profile et al; was adopted by many companies where legislative requirements either allowed or provided waivers for such mechanisms.
“By using technology to stream audio, video and presentations, to authenticate online attendees, receive questions, collection of votes, tabulation and declaration of results; several logistics for holding a physical meeting were not required,” comments Jain.
SRD II in particular drove the requirement to speed up traditional processes, which meant the better utilisation of digital technologies – real-time processing and transparency across the chain of intermediaries being the biggest themes and objectives for many, according to Broadridge’s Derem.
Looking at investor communications horizon, in early 2020 Broadridge took the conscious decision to not only update its current technology and platforms to be SRD II compliant but also to re-platform its various institutional- and retail-based proxy solutions under a new digitally-enabled, cloud- based infrastructure.
While Jain agrees there were certain regulatory measures like SRD II that were pushing these proxy voting processes towards standardisation and digitisation, he suggests COVID-19 accelerated the technology adoption for processes.
This includes processes like shareholder identification, meetings announcement digitisation and communication, shareholder interactions and voting procedures to bring in cost efficiencies and address increasing customer demand for online services due to remote working.
Challenges
Although SRD II has acted as a catalyst for change in speeding up processes in proxy voting, it has not come without its challenges.
SRD II was rolled out as a directive rather than a regulation allowing each member state to transpose local compliance as they saw fit.
Derem explains that in many cases, transposition included subtle differences and often additional requirements for both issuers and intermediaries. As a consequence, a number of interpretation and market practice issues occurred, particularly around messaging between counterparties, which are still being addressed.
“Key legal definitions, especially what constitutes a shareholder, added additional complexities for intermediaries reengineering their operating models to be SRD II compliant,” affirms Derem.
Meanwhile, the EU is set to review implementation challenges in 2022/23, and Derem says many market participants are now starting to refer to as the start of SRD III. Further challenges within the proxy voting space include the execution of voting rights where the rights holders have no financial interest in the companies.
For many markets, the rights to vote are determined by the record date holdings and these markets have a significant timespan between the record date and the meeting date.
Jain explains: “As a result, the trades happening between this period transfer the financial interests in the companies to the new buyers, effectively the new beneficial owners; however, the voting rights remain with the sellers because they held shares as of the record date.“
“Similarly, there could be funds that hold large quantities of shares in a company and hedging against these positions with put options; effectively having a zero or many times negative financial interest. A joint effort would be needed from the custodians and the financial intermediaries to put volumes of such empty votes in statistical context before addressing them.”
An evolving space
While investment strategy and the ability to hold securities globally have evolved, do processing for meetings still remain largely manual. However, Broadridge’s Derem says there are some common misconceptions, and it can be confusing — unless you are familiar with the process, it is easy to get lost.
Through the widespread industry usage of Broadridge-related proxy infrastructure and solutions, proxy over the last decade or so has benefited from extremely high levels of straight-through processing.
Nonetheless, Derem cites that some restrictive market nuances and local and national laws remain which have limited the full adoption of digital solutions.
He comments: “Downstream ancillary services provided by custodians such as lending, triparty collateral and sanction screening have also created complexities in the adoption of full end-to-end automation. Due to the pandemic and SRD II, the industry in certain ways has been forced to relook at its traditional operating models and replace certain manual processes with automation or digital communications. Whilst some of these electronic processes were introduced as emergency measures by local regulators and authorities, we are hopeful that some of these will become a more permanent fixture.”
Looking to the future, Broadridge expects to see further global initiatives and focus on corporate governance and ESG as national authorities and regulators look to continue the momentum.
Jain predicts that the key element that IHS Markit sees metamorphosing over the coming years in this digital age is “the trust” that is bound to change form from physical entities to secure digital records.
As digital technologies evolve to replace human trust in institutions like governments, companies, banks, lawyers etc., their adoption in the proxy voting space is inevitable, according to Jain. A number of consortium-based distributed ledger technology proofs-of-concept are being explored by many industry players for application in proxy voting space.
Jain muses: “Whether it is the establishment of ownership of securities and linking of voting rights with those or about the collection of voting instructions and improves vote execution transparency or it is about the transfer of voting rights to corresponding proxies; the possibilities in this space are all trust-based and can be addressed by distributed ledger-based technologies. So, this is another trend that we see gaining strength over the coming years.”
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