Global voting – important but often dificult

Why is voting a priority area for NBIM?

The general meeting elects the company’s board and reaches decisions on matters of great importance to the company. Voting by NBIM and other shareholders at general meetings helps to make the company’s board and management accountable. The role of the general meeting is not to micro-manage the company but to provide a means for shareholders to ensure that the board and management do not use their powers in ways that confl ict with all shareholders’ interests and rights in the company.

Traditionally, institutional investors with highly diversifi ed international portfolios and small holdings in individual companies have tended not to exercise their voting rights. However, this investor group is gradually becoming a force to be reckoned with in most markets, and is in a better position than before to infl uence the outcome of matters put to the vote. This group is also in a better position to ensure that the decisions taken are indeed representative of the company’s shareholder base.

Traditionally, institutional investors with highly diversifi ed international portfolios and small holdings in individual companies have tended not to exercise their voting rights. However, this investor group is gradually becoming a force to be reckoned with in most markets, and is in a better position than before to infl uence the outcome of matters put to the vote. This group is also in a better position to ensure that the decisions taken are indeed representative of the company’s shareholder base.

Cross-border voting is both costly and labour-intensive, and the systems in the individual markets are not well suited to having a large proportion of equities held by international institutional investors. There are currently no global standards regulating the broad range of existing practices when it comes to voting. It is not only the practical and economic challenges of cross-border voting that present a problem for shareholder democracy.

Efficient and less costly voting processes will result in greater participation in voting and increase the infl uence that we and other institutional shareholders have over the development of listed companies. We aim to work with other investors, regulators and the many players involved in the voting process to bring about more efficient voting.

Together with the Center for Corporate Governance at the Tuck School of Business at Dartmouth College in the US, we have embarked on an analysis of the statutory and regulatory aspects of voting, local recommendations for best practice, and market practice at the largest companies in a number of countries. The results of this analysis will provide a sound foundation for our continued work on making the voting process more effi cient and straightforward.

NBIM wants to help make voting more efficient

 It has become easier and less expensive to exercise voting rights in most markets, but there is still a need for large amounts of manual processing in the actual casting of votes, and large volumes of information and documentation to be handled. For large investors, the cost of global voting can be justified; for smaller investors, the cost may be too high, with the result that they choose not to vote.

In some markets, shares registered in the name of the custodian bank must be re-registered in the name of the shareholder for the shareholder to be able to exercise his voting rights. This re-registration is not automatic, needs to take place within set deadlines, requires collaboration between a number of players, and must often be done before the shareholder even becomes aware that a general meeting is to take place.

 

Registration and establishment of voting rights

Institutional investors vote mainly through their custodian banks and their local agents. For practical, fi nancial and, in some cases, legal reasons, the custodian bank rather than the actual shareholder may be registered as the owner of shares in a company’s share register. Widespread use is also made of proxy agents and their webbased voting platforms. It is not uncommon for companies to use agents to handle all of the practical sides of a general meeting, and the local securities depository plays a role in establishing holdings and voting rights in many markets. This complex set of players, which can vary with the type of investor and the market in question, can be diffi cult and expensive for shareholders to deal with. NBIM wishes to promote and support the work that is under way in a number of markets to simplify the network of players that need to be involved in order to exercise voting rights.

In some markets, shares registered in the name of the custodian bank must be re-registered in the name of the shareholder for the shareholder to be able to exercise his voting rights. This re-registration is not automatic, needs to take place within set deadlines, requires collaboration between a number of players, and must often be done before the shareholder even becomes aware that a general meeting is to take place.

Ideally, a shareholder will be able to vote for the shares he holds on the day of the general meeting. In some markets, this is ensured by blocking the sale of shares for a set period ahead of a general meeting. In practice, this means that the investor has to choose between exercising his voting rights or retaining the freedom to sell his shares without restrictions. This blocking of shares is seen in many European markets.

In markets where shares are not blocked, voting rights are based on holdings on a set day – the record date – ahead of the meeting. The shareholder is free to sell his shares after this date, and so there is no guarantee that those exercising their voting rights actually hold the equivalent number of shares in the company on the day of the meeting. The use of record dates is becoming more and more common, but there are major variations in the length of time between record date and meeting. In many markets, companies themselves can decide on the record date, which makes the situation even more complex. In the US, the record date can be as many as 60 days ahead of the meeting; in other countries, the record date comes just a few days before the meeting – two days, for example, in Italy and Australia.

NBIM aims to promote the simplifi cation of the aforementioned processes for the establishment of voting rights in a number of ways. We want markets to introduce systems that do not require shares to be blocked, and we want it to be possible to cast votes closer to the general meeting.

Representation

Institutional investors that choose to vote globally normally do so by appointing an agent to attend general meetings and vote on their behalf. The voting rules in many countries have not been updated to take account of the large proportion of votes being cast by proxies. Such voting may therefore be complex and labour-intensive, due largely to manual processing by the players involved. In some markets, there are restrictions on who may be appointed a proxy, the number of shareholders for which a proxy can vote, and the degree to which the proxy can vote differently for the different shareholders represented.

In many markets, investors who use a proxy must issue a notarised power of attorney giving the proxy the right to attend and vote at a general meeting. In some markets, this power of attorney can cover all companies; in other markets, a separate power of attorney is needed for each general meeting, or a power of attorney may apply only for a limited period. In a number of markets, the proxy must be able to produce the original power of attorney (“wet copy”). There are obvious administrative costs associated with meeting these requirements.

Few countries allow electronic (or postal) voting. A number of markets have opened the door to electronic voting – including the US, Australia, Japan, the UK and Germany – but it has been introduced at only a small number of companies. NBIM wishes to promote and support the introduction of legislative changes so that physical attendance at general meetings is not required.

Information

All documentation and information relating to a general meeting needs to pass through a chain of service providers from company to investor, and the investor’s voting instructions need to head back the same way. The more players involved, the longer these processes take. Each player sets his own deadline, often allowing a little extra time so that he can be sure to meet the deadline set for him.

General meeting documentation is often published only in the local language and so needs to be translated, which is expensive and often unsatisfactory. The time that shareholders ultimately have to decide how to vote depends largely on the complexity and length of this voting chain, and it is not uncommon for shareholders not to have the information needed for an informed decision. We want to try to ensure that companies provide more

satisfactory and timely information about their general meetings and the matters being put to the vote so that we can cast an informed ballot.

Voting results and disclosure

Investors who vote through custodian banks and proxy agents can request confi rmation that their votes have been cast from the company or its agent. However, there is no requirement that companies confi rm that they have received and accepted votes. There are also major variations in whether and how companies are to publish the results of general meetings. In both its dealings with individual companies and its dialogue with regulators and the network of service providers, NBIM aims to encourage practices whereby all votes are counted, there is an audit trail for the votes cast, and companies publish the results of votes.