The Investment Engineers
29-10-2012 | Insight | Michiel van Esch
After one AGM vote too many went astray, Michiel van Esch initiated an audit to investigate what happens to proxy votes after asset managers issue their instructions. The results, he says, were “shocking”.
“In April, we received a call from a Dutch financial institution, asking why we voted against its incentive program,” notes Engagement Assistant Michiel van Esch. “But we hadn’t voted against it. Our vote had been processed incorrectly.”
This is not an isolated incident. Most asset managers have had similar experiences and the newspapers have eagerly reported such hiccups during the 2012 reporting season. What is clear is that when shareholders exercise their voting rights by proxy, their instructions do not always reach the shareholder meeting correctly.
Proxy voting process is complex and non-transparent
Still, when you realize how many steps can be involved, it is perhaps no surprise that votes aren’t processed properly. After all, as many as 10 parties can be involved.
Chart 1 shows what a voting chain often looks like. After an asset manager has issued his voting instructions for a shareholder meeting, his voting agent transfers them to a custodian, often via one or two intermediaries. The custodian then moves the voting instructions on to a sub-custodian. The sub-custodian often needs a couple of parties—perhaps a notary or a registrar, depending on the jurisdiction—to get the votes to the company secretary.
Chart 1: how complex the proxy-voting chain can be
How common is it for voting instructions to go astray?
For sure, the complexity of this system gives plenty of opportunities for mistakes to be made: votes can get lost or be processed incorrectly. But what is not so certain is how often such errors occur. Does something go wrong every now and then, or is it more like the norm? Robeco decided to investigate.
There was a very good reason for doing so. Robeco votes at approximately 3,000 shareholder meetings a year. Only a handful of meetings are attended in person: the majority are voted on by proxy.
Vote audit initiated
Van Esch and colleagues selected 16 companies for a vote audit. The companies were asked to confirm that Robeco’s votes at their AGMs were processed correctly. If they were unable to do so, Van Esch would trace the votes back along the voting chain to find out what happened to them.
Most of the selected companies seemingly did their best to help. “We received no response at all—even after several attempts to get in touch—in only in two cases,” notes Van Esch.
“It is shocking that only five of the 16 companies could confirm what happened to our votes”
Some weren’t that cooperative, however. Take the example of US energy group Chevron. “Our contact there told us that it would only disclose voting instructions to proxy solicitors, proxy tabulators and the inspector of elections. That’s because it wants to protect the privacy of shareholders,” says Van Esch.
Omnibus-account votes are processed in bulk
He concedes there are some mitigating factors for companies. The structure of the voting chain is one reason why they are unable to confirm what happened to their shareholders’ votes. For omnibus accounts, custodians process votes in bulk. As such, it almost impossible to confirm what happened to votes all the way to the company itself.
But even when votes are processed separately, it is still difficult to track votes. That is because sub-custodians and other parties often use different registered names and types of account identifiers for funds.
In the course of his investigation, Van Esch was inundated with requests for a plethora of identifiers and account details—such as “skontro” numbers, Brazilian tax-registration numbers or seven-digit account-registration numbers. “When we could not provide this information, we were pointed towards the party one step back in the chain,” says an exasperated Van Esch. “They, in turn, often needed different identification details.”
These painstaking efforts were worth it. The results of the investigation are eye-opening: Van Esch describes them as “shocking”. “In only five out of the 16 instances could the company itself confirm what happened to our votes,” he says. In all the other cases, he was either directed to other parties or was asked for account-number information that he was unable to provide.
The vote audit in numbers
But what about when they did find out about the fate of the voting instructions? This is more reassuring. “To the extent that we were able to find out what happened to our votes, things largely went to plan,” says Van Esch.
Mistakes did occur, however. In two instances, the number of shares voted was smaller than instructed. At the AGM of German engineering giant Siemens, the custodian was only able to confirm 85% of Robeco’s votes. “At the same time, the company could not find any of our holdings represented at the meeting,” he says.
The inquiry suggested that stock-lending and selling activity can account for some of these differences—but not for the amounts discovered. In some instances where stock lending took place or some shares were sold after the voting deadline, the instructions on these shares were cancelled.
Voting “for” and “against” the same motion
That’s not the only issue to have emerged. “In one case, our votes were processed with different instructions,” he says. At the AGM of UK-based consumer-products manufacturer Reckitt Benckiser, the initial instructions for two accounts were changed. “We decided to approve the company’s guidelines on publishing details of upcoming shareholder meetings, given that they were in line with local guidelines and—on balance—in shareholders’ best interests,” says Van Esch.
But the instructions for the two accounts were processed in opposite ways. “Due to this faulty processing, we ended up voting both for and against the motion,” he notes. The lesson learned was that overwrites may be subject to confirmation problems between parties, especially close to the voting deadline.
The situation is alarming
Van Esch concludes that although he was able to confirm what happened to some of the votes, the situation is far from satisfactory. “The picture is alarming,” he says. After all, in three cases, no clarity about Robeco’s votes could be provided. And of the remaining 11 AGMs, on two occasions the votes were processed with either an erroneous number of shares or with incorrect voting instructions. That isn’t very encouraging.
This research provides strong evidence of the need to improve the proxy-voting process. What’s the solution? Van Esch points to the first steps on what will be a difficult road. “Standardization and cooperation between all parties and between all markets is of the utmost importance,” he suggests. That will be a good start.
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