Wednesday, 15 July 2009

Voting, engagement and disclosure

One of the most recurring arguments that I’ve had to deal with in the years I’ve spent looking at how institutional investors vote at company meetings is the idea that votes don’t actually mean that much. Lots of fund managers have told me over the years that just looking at their voting doesn’t tell you much, because actually they engaged with the board behind the scenes and got some results.

I’ve always been a bit unsure about this argument, but, principally because I hadn’t been involved in much interaction with company boards directly myself, I took it largely at face value. However the more I’ve been involved in talking directly with companies, including trying to influence them over specific issues, and the more research I’ve done into voting trends the more I think it’s fundamentally wrong.

For one, I have absolutely no doubt that many boards are very interested in how shareholders plan to vote when there is a large pool of dissent. And the threat of voting against them does carry some weight. But in order for companies to be influenced there has to be a credible threat that you may vote against. Those managers that routinely support management are simply not credible in such a negotiating environment.

Having researched manager voting in one way or another for about 6 or 7 years now, I have a pretty good idea of how various fund managers are likely to vote on given issues (I wasn’t surprised by some of the votes against the shareholder resolution at M&S for example). I can’t believe that a smart investor relations department doesn’t know this too.

Secondly, I think it’s only human nature that some managers are more likely to vote for whatever management puts in front of them than others. Confirmation bias is bound to be at play. So managers that are generally supportive of management will no doubt search for information that allows them to justify a vote in favour (and the reverse is no doubt true for more confrontational managers). Although voting guidelines clearly play a role in determining voting outcomes, it can’t explain everything since most institutional investors claim to uphold the Combined Code, yet they reach very different decisions when looking at the same companies. So my view is that actually individual positions and viewpoints are a greater explanation of votes than engagement activity taken alongside.

This leads me, unsurprisingly, back to the conclusion that public disclosure of voting records is a necessary reform. There are without question variances in manager voting that would not be suggested by comparing their voting guidelines, or stated policies on governance issues. But fund manager clients don’t have a hope in hell of seeing this at present because there is so little comparative data available. And to be clear here there are some managers with undeserved reputations for activism if you look at how they actually use their voting rights.

A mandatory disclosure regime would get all the data out in the open and enable proper analysis that would show where managers sit in the voting spectrum. If some clients aren’t interested they don’t have to use it, but those that are would have a useful guide to how managers act in practice, rather than just what they put in their policy documents.

Let’s hope Walker has a look at this tomorrow.

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