The problems in the proxy voting process cause Aled Jones, investment manager ESG at the London Pensions Fund Authority, a great deal of anxiety. The voting chain is incredibly opaque making it difficult to get clear information on what happens at which point. Most importantly, it is almost impossible to determine whether investors’ votes have been successfully lodged by the issuer, says Mr Jones.
“From the perspective of the individual savers with pension schemes, it is completely unacceptable,” he adds. “And for funds like the LPFA, which are working hard to be a responsible, engaged owner by voting all our shares, it completely undermines what we are trying to achieve.”
Mr Jones’s frustration is shared by Jennifer Walmsley, director at Hermes Equity Ownership Services. “We are responsible for exercising the voting rights of our clients, who are mostly asset owners, but it is impossible to tell whether those votes have been sent to the company on time, whether they have been received and whether they have been cast in the way we intended.”
Ms Walmsley believes custodians and proxy agents, employed by the asset owners, should be showing greater awareness of the problem. “The asset owners are paying for a service and it should not be beyond the realms of technological possibility to provide them more transparency and, in particular, confirmation that voting decisions are getting through to issuers correctly.”
One of the reasons for this lack of transparency, says Ms Walmsley, is that there is such a long chain involved. The asset owners employ the custodians, which in turn employ a proxy voting agent, which collates voting decisions and passes them back to the custodian, which then transmits this information to the registrar, who passes them on to the issuer ahead of the shareholder meeting.
As far as the custodians are concerned, the problem lies at the very end of the chain. “We have a sophisticated process for providing transparency for proxy voting and for ensuring that votes are sent to the registrar but we do not get electronic confirmation back from the registrars,” says David Kane, managing director, JPMorgan Treasury and Securities Services. “It’s that final hurdle where things break down.”
Justin Chapman, head of process management at Northern Trust, says: “We can offer direct representation for important votes but that is not a sustainable process for the industry and cannot be supported for every meeting.” A preferable approach would be the development of a global market standard based on ISO message formats and more automation, he says.
Fortunately there are a number of industry forums involving custodians, local market agents, technology providers and registrars that are addressing the issue and developing technology-specific plans. For example, Swift, the financial messaging operator, is developing a new ISO-based extended message format that will be more suitable for proxy voting and for providing the electronic vote confirmation so integral for providing end-to-end transparency.
Lack of automation is not a new problem in the investment industry and efforts to address it are often hampered by arguments over the cost involved and who should bear it. But, says James O’Regan, general manager, investor communications solutions international at Broadridge, a US-based provider of electronic proxy voting services, this need not be a costly process. “The issue of cost does come up from time to time but I don’t think it’s a big barrier. We are not introducing any big technology changes.”
Nevertheless, says Mr O’Regan, it is something that requires the involvement of all participants because it really is a matter of getting everyone to agree on common standards and to apply technology across a common platform. However, the concern among pension funds and investment managers is that proxy voting is a non-core activity for many participants, especially the custodians. The margins are low and the incentives to change things do not exist.
But Mr Kane and Mr Chapman are keen to defend the role of custodians in trying to improve the situation. While Mr Kane accepts that the rate of progress is incredibly slow and therefore frustrating for investors, he does not agree that custodians lack the incentives to address the issue. “We are very driven to get a complete confirmation process because we see it as part of our customer service.”
And the LPFA’s Mr Jones, despite his exasperating experience with his service providers, accepts it is neither possible nor fair to pin the blame on one actor. “All participants from asset owners through to sub-custodians and registrars have a stake in this and a role to play. The way around this is to get more pension funds behind the issue and to approach agents as a group.”