Proxy voting and the effective functioning of markets
While the world’s attention is focused on the US Presidential elections this week, this post addresses a different kind of voting: shareholder voting.
In Developed equity markets, we have seen a progressive fall in individual share ownership. For instance, in the UK, the Office for National Statistics now estimates that UK individuals own just 12%1 of quoted shares for UK domiciled companies, with 34% held by UK unit trusts, insurance companies, and other institutions, and the remaining 54% in the hands of overseas investors of all kinds. In the US, over two-thirds of the US public equity market is managed by institutions2. So most shareholder voting is now in the hands of proxies: managers or advisors exercising voting rights on behalf of others. And along with the rise in proxy voting has come an increase in expectations around the exercise of those votes. For example, the US Securities and Exchanges commission issued a rule in 2003 that emphasised the fiduciary duty associated with proxy voting, the need to vote in the best interest of clients, and the need to provide information on how proxies are voted.
The investment management community as a whole is taking this more seriously than ever. That’s not just because of the higher expectations, it’s also a reflection of growing recognition that corporate governance really does matter.
It matters because – unless you’re convinced that markets are perfectly efficient through some sort of magical process that occurs all by itself – protecting shareholders’ interests requires positive steps, not just sitting back and counting on vague “market forces” to take care of everything. On issues such as executive compensation, those who exercise voting rights need to pay attention to what they’re voting on if corporations are indeed to be run for the benefit of shareholders rather than management. Proxy voting is key.
Russell Investments & proxy voting
Rob Kuharic, an investment strategist at Russell Investments, describes how an active proxy voting program works in practice: “It’s very hands-on. From the proxy voting guidelines we have crafted and evolved over nearly 30 years to the individual ballot items, a lot of attention is directed to this effort. We take input from Glass Lewis [a proxy advisory service], and we weigh that against our own assessment and guidelines. Many shareholder proposals are poorly drafted, or too specific on operational details, things we see as best left to management. Items that tend to attract our interest concern topics like board composition, proxy access, political spending and executive compensation. But each agenda item and shareholder proposal needs to be considered.”
The result is a process which in 2015 was faced with over 90,000 agenda items at over 9,000 shareholder meetings – and led to votes against management on over 12,000 occasions (roughly 13.5% of items.) Russell Investments voted in favour of 31% of shareholders proposals (346 in total.) As Rob explains, “Both of those statistics run above industry averages, reflecting the scrutiny and seriousness we place on this part of our role as investment manager. In our role as a fiduciary, we believe being active on corporate governance matters is important.”
This seriousness is part of a trend across the whole industry to pay more attention to corporate governance. It’s an important – if rarely talked about – part of the role of every investment manager.
1As at the end of 2014
Bob Collie, Chief Research Strategist, Americas Institutional