Driven by a growing appetite for greater transparency and accountability in corporate governance, proxy voting has become an important benchmark and significant headway has been made in bringing end-to-end vote confirmation capabilities to market.
Driven by a growing appetite for greater transparency and accountability in corporate governance, proxy voting has become an important benchmark and significant headway has been made in bringing end-to-end vote confirmation capabilities to market. These initiatives have been prompted by market participants and regulators alike and as market activity levels increase globally so does investor participation in corporate governance.
Disclosure obligations: international reforms
Extended regulation and codes of practice around the world have increased the need for financial institutions, asset management companies, investment and annuity firms to comply with new rules on their investor vote reporting. These guidelines aim to improve transparency and encourage responsible investor engagement by requiring firms to transform their disclosure of proxy voting history to a best practice model.
Since 2010, the UK Stewardship Code has encouraged asset and investment managers to participate in the stewardship of the companies in which they invest. The code was designed to increase engagement and to ensure that investors were playing a more responsible role in all aspects of the process, including disclosure of voting activity.
In September 2012, the Financial Reporting Council (FRC) issued its revisions to the UK Stewardship Code for responsible investment, a change in focus that has had a major impact on asset owners.
The FRC extended vote reporting requirements to apply not only to asset managers, but also to the underlying asset owners, including pension funds, charity trustees and other beneficial owners. These parties now have a responsibility to either actively participate in the process themselves, or be more accountable for the activity of those asset managers acting on their behalf. Key principles of the code require investors or asset owners to “have a clear policy on voting and disclosure of voting activity” and “report periodically on their stewardship and voting activities”.
In April of this year, the EU Shareholder Rights Directive also underwent revision. The directive is intended to modernise company law and enhance corporate governance in the EU by improving of the rights of shareholders. In particular, the directive focuses on ensuring that shareholders have timely access to the complete information relevant to general meetings and facilitates the exercise of voting rights by proxy. The European Commission notes that the amendments now make it easier for shareholders to use their existing rights over companies and enhance those rights where necessary. This will help to ensure shareholders are more engaged, better hold the management of the company to account and act in the long-term interests of the company.
In Australia, the government introduced the Stronger Super reforms to make the Australian superannuation system more efficient and to help maximise retirement income for superannuants.
The Australian reforms aim to create a new simple, low-cost default superannuation product called ‘MySuper’. The intent is to make the processing of everyday transactions easier, cheaper and faster through the ‘SuperStream’ package of measures, and ultimately strengthen the governance, integrity and regulatory settings of the superannuation system.
The changes also include enhancements to the disclosure and reporting requirements for superannuation. In May 2014, Australian Securities and Investments Commission announced a delay in additional holdings disclosure reporting requirements, which were due to come into effect on 1 July , but fund managers have generally sought to adopt best practice around proxy voting disclosure regardless of the holding disclosure delays. These disclosure requirements are expected to demand consistency and transparency in how information is calculated and reporting is delivered.
In addition, Australia’s Financial Services Council, the self-regulating financial service member body, released Standard 13 in 2013, requiring members to maintain voting policies, become more active in proxy voting and to disclose their proxy voting activity. These regulations complement the Stronger Super reforms, and have produced a greater level of guidance and detail, which even non-member fund managers are finding useful to adopt for onshore and global voting activity.
In emerging and emerged markets, greater disclosure and transparency regulations are also a primary focus. The Securities and Exchange Board of India (SEBI) sets out to “protect the interests of investors in securities and to promote the development of, and to regulate, the securities market”. A new set of disclosure guidelines for mutual funds and asset management firms came into effect as of 1 April of this year. The guidelines require mutual funds and asset management companies to improve transparency and encourage them to diligently exercise their voting rights in the best interest of unitholders.
Regulation to implementation: market participants driving positive changes
While regulators are writing new rules to provide greater rigor to disclosure practices in markets around the world, participants are collaborating to implement technology-driven solutions, such as end-to-end vote confirmation, to improve vote transparency.
In the US, end-to-end initiatives are being driven largely by an initiative of the University of Delaware, Alfred Lerner College of Business and Economics, Corporate Governance Center. Building on pilot projects conducted in the 2012 and 2013 proxy seasons, this year’s initiative was extended to include transfer agents. Four transfer agents and Broadridge are offering end-to-end vote confirmation to 29 issuers representing two million beneficial shareholders.
“End-to-end vote confirmation continues to gain traction in the US. Since we began the pilot projects, we have seen an increase in participation levels. The 2014 project is significant in that Broadridge built a new communication tool that allows various transfer agents to access and exchange information on the end-to-end platform. Fundamental to the success of end-to-end projects is the cooperation between participants. Transparency depends on collaboration and commitment across the entire voting chain,” says Patricia Rosch, president, investor communication solutions international, at Broadridge.
Spain was the first EU country to pilot an end-to-end vote confirmation project in 2013. In 2014, the pilot project was expanded. It included the participation of the same three issuers and the registrar, as well as nine custodian firms—three more than the prior year. In 2013, the pilot allowed for confirmation to the global custodian only. The 2014 initiative was enhanced by the distribution of electronic vote confirmations directly to institutional investors. This post-meeting confirmation represents a full end-to-end test of the solution.
“The results of the pilot are extremely positive,” says Rosch. “For one of the meetings, the percentage of shares participating in the project grew year-over-year from 2.5 percent in 2013 to 25 percent in 2014. This increased participation is establishing what will become the benchmark for best practices in proxy voting disclosure moving forward.”
“We’re very excited by the results of end-to-end projects that are happening in the US and Spain,” says Rosch. “What’s particularly encouraging is that initiatives to improve transparency, accuracy and accountability are happening at a time when markets are experiencing record levels of activity.”
She adds: “In 2014, our global proxy business—which represents all markets excluding North America—saw a record high number of annual meetings; over 43,000 were held in over 90 countries. By extension, we also recorded record high volumes in proxy voting. Worldwide, 5.2 million proxy ballots were issued and 4.3 million account holders, representing 3.2 trillion shares voted. These numbers are staggering, and underscore how vital transparent and accurate proxy voting systems are to the capital markets.”
“In an environment where volumes of both domestic and cross-border investor activity is so high, it becomes even more important that the systems in place ensure good corporate governance related to proxy voting and disclosure.”
Building on this momentum, Broadridge is working with market participants to conduct pilot projects in the UK, Canada and Taiwan.
