Written by Dean Little, Co-Founder and CEO, Proxymity
Few would question the importance of technology in improving shareholder democracy and relationships between company boards and shareholders, but despite all the technological progress in recent years, the infrastructure needed to support the amount, quality and depth of engagement between shareholders and the companies they own is widely considered to be falling short.
A digital overhaul of the old shareholder communication processes currently in place is needed to provide the foundation for shareholders to be able to accurately manage, record and report their engagement and track them to actions and assess the impact those engagements had.
A few decades ago in a pre-digital age, when shareholders received notices about upcoming annual general meetings and proxy votes, such was their low expectation of having any impact, the communications would frequently go straight into the bin. Understandably so. The voting process was largely a rubber-stamping exercise with individual shareholders having no voice and institutional investors mostly taking a hands-off approach. Shareholder influence was minimal.
Yet now, when shareholders have the means to vote and a greater say in how a company is run, apathy and abstention seem to prevail in many cases. AGM (Annual General Meeting) votes still tend to overwhelmingly back the recommendations of the board. The fact the most AGM resolutions get passed by 95% or more1 should raise an eyebrow or two. It’s a rare, even newsworthy, event when resolutions are defeated – such votes usually relate to executive remuneration which has historically increased year-on-year2.
Despite their being an incredibly dedicated set of investors who take and practice their stewardship responsibilities very seriously it points to a failure in investment to provide an effective communications platform for shareholders outside this core group to meaningfully engage and assess the companies they invest in. This is bad for both parties and can lead to poorer corporate performance and lower investment returns. Often it can mean a company adopts a strategy that does not represent the values of all of its investors and leaves the dedicated investors that they cannot galvanise other fellow shareholders into more action.
Investor interaction with companies falls short
AGM voting patterns very often reflect shareholders making the company chair their proxy, but there are other factors too. The State of Stewardship report3, published in November, notes the rise of “passive” index-tracking funds and fewer investment portfolios allocating to UK equities. These trends mean that less time is spent engaging with and examining portfolio companies, which in turn results in investor interaction and best practice falling short.
This disconnect has contributed to the decline in the number of publicly listed companies in Western economies.4 Companies now tend to stay private for longer, going public much later in their life cycles, meaning that a sizeable portion of value creation takes place before the company is publicly traded.
This is turning investors to private equity and other alternative investment options, such as energy and real estate.
Of course, company concerns on this matter may reflect deeper concerns that the voting outcomes may not always work in their favour. Most decisions are rubber-stamped, such as declaring a dividend, reappointing the auditors and share buybacks. But the issues of executive remuneration and director appointment or re-appointment, along with possible political donations can be more contentious. It could be that boards don’t always get what they want.
One area of contention is the notice period of AGMs. Company law requires 21 days’ notice for all general meetings. Some companies argue that they need a shorter period or 14 days to be able to react quickly to urgent corporate events, including takeover attempts. Cutting the number of days would reduce shareholder democracy, because fewer would be able to attend at short notice and it also would mean less time for fund managers to do their analysis to make the right decisions.
More accountability, more transparency needed
Greater shareholder democracy means more accountability and more transparency. Proxymity is long-time advocate of delivering an ecosystem that brings these qualities to the fore. It recognises that the current macroeconomic climate has intensified the need for enhanced communication with shareholders, many of whom will be concerned about the prospect of recession, slow growth, environmental impact, and company strategy to deal with these challenges. Scrutiny of executive decision-making is sure to increase. So, understanding and incorporating at least some shareholder thinking is vital.
In the US, the Securities and Exchange Commission’s adoption of rules requiring the use of universal proxy cards5 is a real step forward. Proxy cards now include all director nominees presented for election at a shareholder meeting. This allows shareholders to vote by proxy for their preferred combination of board candidates. It put investors voting in person and by proxy on an equal footing, thereby improving shareholder democracy.
The corporate governance process clearly needs a technological overhaul and also needs a re-design to fit with the expectations and profile of a retail shareholder. An analogue system in a digital world no longer works – it’s inefficient, lacks transparency and increases the risk of error and non-compliance. For retail investors who may not have time to review every meeting or make decisions on a case-by-case basis as many institutional investors do, this is an especially pressing issue. Under the current proxy voting system, companies lack a direct notification channel to their investors, thereby obstructing effective communication and requiring expensive research to properly understand voting activity. At the same time, investors very face tight deadlines to research and finalise investments decisions, without knowing if their voice has been heard; for busy professionals or those with stocks held in savings pots such urgency can be overwhelming.
This inefficiency and friction costs significant amounts of money, and whether much of that cost is borne by the intermediaries and shareholders directly, or as is the case in the US, by the issuers, it still ultimately comes out of shareholders pockets and impacts shareholder returns.
Modern proxy voting technologies are essential to any push for a more effective and transparent form of shareholder democracy. Instant meeting notifications and true confirmation that each vote has been received and recorded grow investor confidence and engagement and provide a backbone to accurately recording issuer engagement. Ultimately that’s what all parties want.
