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The challenges of proxy voting practice

The UK has a relatively efficient proxy voting process, but there are improvements to be made, argues Jude Moore.

Recent changes in the voting landscape, such as the greater use of polls, the requirement for directors to be re-elected every year, the binding vote on remuneration policy and the introduction of the Stewardship Code, are leading to ever greater scrutiny of proxy voting processes and results. Both investors and issuers are engaging in increasing levels of dialogue, with higher expectations of transparency of vote data.

Despite the fact that the UK has a proxy voting process that is more transparent and efficient than many other markets, there is still an underlying uneasiness felt by many market participants that votes may not be being correctly processed, or there is at least a lack of evidence to prove otherwise.

The UK proxy voting process has been examined many times. The Shareholder Voting Working Group (SVWG) was established in 1999 as an industry-wide body to address the issue of improving the voting process in the UK. Since the Myners report of 2004 and subsequent updates, a number of improvements have been made, including the introduction of electronic processing in many aspects of the process. It should be noted that over this period, the average vote in the FTSE350 has increased from around 45% to nearly 70%. 

Data flows
The SVWG reconvened in 2013 with revised membership, intending to review the current process in light of these changes, identify outstanding issues and make recommendations in an attempt to address them. The new group includes participants from all aspects of the voting process, such as issuers, registrars, investors, custodians, proxy voting agencies and Euroclear, as well as interested parties and experts such as the ICSA, the IA, the FRC, legal and governance advisers.

The first challenge faced by the group was to map in detail the data flows in the process, from the issuer distributing proxy materials, and then back in the other direction from the party making the voting decision back to the issuer. It quickly became clear that while each element of the chain was familiar to those active in it, very few participants understood the end-to-end process. This was therefore an iterative activity, with more complexity being added each time the flows were reviewed.

The resulting flowcharts in the report still only represent a simplified version of the possible data flows. In reality there is not one single process by which the information is transmitted; there are many different transmission channels and different people involved in multiple versions of the process. This depends on the relationships and agreements between custodians, proxy voting agencies, fund managers and beneficial owners.

Despite an increase in the use of electronic data transfer in many parts of the process, there is no end-to-end route for voting instructions, and manual interventions are required for a small but significant number of votes. Barriers to transparency include the use of omnibus accounts, the perceived cost of data transfer, and the simultaneous timing of the record date and voting cut-off, which cause investors to have to vote on unsettled positions.

The potential for providing vote confirmation, both to the investor and back to the issuer was discussed at length. At present, the institutional investor who bears responsibility for the voting instruction is not easily able to confirm to the underlying beneficial holder that their decision is reflected in the outcome of the vote. Likewise issuers are not able to easily identify the voting decisions of beneficial holders, either prior to or after the meeting. There are different views on at what point a confirmation of an instruction is useful, given that account positions are liable to change between the instruction being sent and the record date. Several vote confirmation trials have been carried out this year and we await the results with interest.

The paper
The SVWG discussion paper puts forward a number of suggestions for improving the process, from better use of technology, amendments to legislation and best practice guidelines to standardise some parts of the process. The paper does not explicitly address the cost implications of these suggestions, or who should bear those costs, but it is noted that this is a serious concern for all participants and will need to be resolved before any changes can be implemented.

Comments were due by 30 September 2015 but the SVWG will be able to receive feedback for a short period after this date. You can download the full paper here.

Jude Moore is a senior assistant company secretary at BP p.l.c.

Published: 27 October, 2015