Monday, 26 November 2007

If voting changed anything...

I was having a chat with a work colleague about shareholder voting today and was (kind of) surprised to hear about one of the ways in which the financial services industry disincentivises the exercise of voting rights in a certain situation.

Typically a pension fund's shares are legally held in a nominee account by a global custodian. Both pension funds and custodians can make money by lending stock for a fee. From what I have heard the custodian usually does pretty well out of this even though they are the pension fund's shares. Some funds, however, stipulate that they will want to recall lent stock if a contentious voting issue arises. All well and good and exactly what Paul Myners (in the Shareholder Voting Working Group) says should happen.

However what I learnt today is that custodians make it fairly obvious that if a fund wants a recall option on its stock, it is going to go to the bottom of the list of investors they tap up when someone wants to borrow stock. Stock-lending is actually a quite a profitable thing for pension funds to do (I have a question about whether this is in tune with their long-term interest if the stock is used to short a company they own, but that's for another day) so effectively custodians are providing a financial incentive for funds to not recall stock out on loan.

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