Do fund managers have a duty to decide for themselves how to vote?
Well thank goodness its June and two major events are over. Firstly the eruption of that volcano with the long name beginning with E which I won t write because it isn t in my spell-check. I sympathise with people who were stranded far from home for long periods of time but I would like to point out the disruption to my working day of listening to people talking about Ash being a nuisance. If I had one Icelandic Krona for every such comment I think I would be very wealthy now, in Icelandic Krona at least (how much is that in Great British Pounds?).
Secondly, the general election. Like many in the business community I m pleased it s all over because with spending cuts announced and a budget imminent from the new government we should now have a period, coalition permitting, of some economic certainty; however unpleasant the certainty might be. One thing that surprised me about the election period was that there was relatively little mudslinging and few shenanigans despite the last government being the most unpopular for some time.
Passing on Responsibility
The most eye-catching shenanigans were reports of the alleged fraudulent abuse of postal voting in some parts of the country. There were accusations that in some households there were as many as eight people registered to vote and that this must be due to fraudulent registrations. Channel 4 News covered this story very well and went into the house of a local councillor in south east London implicated in the affair. She showed them eight beds and eight toothbrushes which seemed to indicate that there were indeed eight voters in the house.
But this story got me thinking; so what if some people were voting on behalf of others? Perhaps those other people were happy with this. Perhaps some people just couldn t be bothered to read the parties manifestos (and let s face it how many of us did?), but still felt they ought to participate in the democratic process. What if those people passed the responsibility on to other more knowledgeable people whom they trusted to evaluate the manifestos and accepted advice on how to vote in the best way for the country and themselves. Would there be anything wrong with that? Is it bringing the democratic process into disrepute? Is it morally and ethically suspect? Do we have a duty to decide for ourselves how we vote?
AGM Time
May, of course, is also the month of AGMs for many companies. Whilst few companies get a good turnout of shareholders, it s always interesting to see how the proxy votes have been cast for resolutions at an AGM, especially where there is something potentially controversial.
Unfortunately, its not unknown for lazy institutional shareholders to just put a tick in the For column assuming that this is the default that the company wants and I heard that in one case this caused a problem because a dissident shareholder was inadvertently voted onto the board of a company due to shareholders not reading the notice of AGM properly.
So, in light of Lord Myners pleading post credit crunch that institutional shareholders should engage with companies they invest in and not become absentee landlords , how seriously do institutional shareholders take their voting responsibilities? Talking to various advisers in the City, it seems to be generally accepted that institutional shareholders don t devote a great deal of time on deciding how to vote and actually executing their votes. This can be especially troublesome when there is a corporate transaction to get passed at a general meeting of a company. The company would often like to show a high level of support from shareholders for a transaction but brokers often worry that those supportive shareholders will not get their act together to submit their votes.
PAFs
Over the last month or two many Finance Directors of public companies will have received questionnaires from proxy advisory firms ( PAFs ) requesting further information relating to resolutions to be tabled at forthcoming AGMS. Whilst these firms provide a wide range of services including risk management, automated voting and financial research, a core offering is analysing Annual Reports and AGM resolutions of public companies and issuing advisory notes to their fund manager clients. PAFs now form a rapidly growing business and the largest, RiskMetrics, services 2,400 clients worldwide and recently reported revenues of $77 million for the first quarter of 2010.
PAFs are now becoming increasingly vocal about governance matters and arguably providing a useful voice in the governance debate. Only last week RiskMetrics issued a critical note of the Prudential s proposed acquisition of AIA, the Asian business of AIG, and urged its clients to vote against the deal.
Over the last year, other companies have been the subject of proxy advisory firms ire; Marks and Spencer, BT and Tesco are amongst those to have come under the spotlight for their remuneration excesses. Infact, in 2009 RiskMetrics recommended voting against the re-election of 20% of the directors in the companies it covers worldwide.
But is this growing influence by PAFs a problem? Surely not, as the Association of British Insurers has been undertaking such a role for some time, issuing red, amber, blue and green "tops" to alert members to corporate governance issues in annual reports. Supporters would argue that this analysis is increasing the sum of all knowledge and allowing shareholders to make informed decisions about how to vote. In fact the industry is even increasing the range of topics covered. Recently, Glass Lewis, a US proxy advisory firm, began to include environmental and social data to its research service; a response to client demand in recognition of the fact that this is a growing area of risk for many companies and hence a factor in shareholder returns.
Important Issues
Another trend over recent years has been that in many financial institutions the people actually voting for or against resolutions in companies now form departments of their own, staffed by corporate governance experts, totally separate from the fund managers holding the investment. This whole area gives rise to what I believe are some very important issues.
Should we question whether this separation is healthy and does the additional layering of a third party in the form of PAFs make it any less (or more) healthy?
Does it mean that these corporate governance departments vote on a tick-box basis without really understanding the specific circumstances of each company their colleagues in fund management are invested in.
Should boards of public companies be concerned that at the recommendation of one advisory firm they could face a massive block vote due to investors blindly following advice from advisory firms?
What does the intermediary role of PAFs mean for the engagement by investors with companies they invest in? Is it potentially undermining the increased engagement sought by regulators and governments?
Should we expect our pension fund and investment managers to be forming their own opinions on the acceptability of transgressions by companies, taking them in the full context of company performance and history rather than on a purely standalone governance basis?
Moreover do fund managers have the skills to play this role and do their bosses allow them to perform it?
I don't know the answers to these questions but as we slowly emerge from the banking crisis these are probably matters we need to be asking if we are to avert a crisis in this sector. It may sound like a relative backwater in the financial world but then so did ratings agencies before the credit crunch.
Finally, let s accept that in any business there will be competition and the PAF industry is no different. As a PAF how do you differentiate yourself from your competitors? Do you become more strident? Do you seek conflict to demonstrate your strength and gain headlines and publicity for your own business needs?
All publications like to promote their power and influence. After the 1992 general election which unexpectedly produced a fourth successive Conservative victory, The Sun proudly proclaimed, in true Kelvin Mackenzie style, It's The Sun Wot Won It . How many people actually outsourced their voting decision to The Sun, we will never know. If PAFs become too powerful and there is more outsourcing of proxy voting then will the shareholder engagement which Lord Myners has been encouraging for effective challenge to boards of public companies be lost for ever?
If so, that could have serious ramifications for the City and make a few fraudulent postal votes in general elections seem fairly trivial.
(c) Ash Mehta
This article first appeared in Aimzine, www.aimzine.co.uk .
