Sunday, 13 March 2011

If voting changed anything...

The exercise of voting rights by shareholders is a key power that the 'owners' of public companies have to influence the managers. The fund management lobby has successfully blocked mandatory transparency in relation to the exercise of these rights for as long as I've been arguing for it (eight years now I think). But the gradual trend towards voluntary disclosure of voting data means that there is more data for geeks like me to play around with.

At work a while back we did a major sweep of asset managers' disclosures to see how they voted at the UK-listed banks in the years up to and including the financial crisis. It's worth being absolutely clear here that if you go back even two or three years the level of public disclosure is pitiful. You swiftly get down to the three or four managers who have been disclosing for years (one of them subsequently stopped due to a reorganisation) so you can't look at a very big sample over an extended period. As such it simply is not possible to put together a full picture of 'ownership' activity pre-crisis. But once you get in 2008 and 2009 the level of disclosure increases and you can get a fair amount of data (still a small minority of all UK asset managers who held bank stocks though).

What we found when digging into the data was a block of about four or five asset managers who rarely opposed management across the period we looked at, with one apparently not voting against management on any resolution at any bank in any year. There was a bit of evidence that one or two managers outside this group took a tougher line once the storm hit, but that block of passivity really troubles me. It's not just the incredibly low level of opposition, but the fact that on the rare occasions when they did oppose or abstain it was on the same resolutions at the same companies. The suggests either a coincidence - quite possible I guess given the low number of votes involved - or some sort of co-ordination, intended or otherwise. By 'otherwise' I mean they could just be following an advisory service recommendation.

Being the saddo I am I keep looking for more voting data. And the more I look, and the bigger the sample gets, the more convinced I am of a number of facets of the 'ownership' of UK PLC as expressed through the exercise of voting rights. First, there are one or two pretty large asset managers that are just a dead weight in the market. They oppose management incredibly rarely (I think I have found one that did not vote against management on any resolutions at any FTSE100 company in 2010), and seem to have acted like this for years. Second, the average level of opposition from asset managers is very low, less than 5% (ie the 'average' asset manager supports 95% plus management resolutions). Third, there is a very small group of managers who are a bit more radical. Finally, given the 'co-ordination' point above, I'm coming to the view that some managers follow the same voting adviser's recommendations (it's either that or they are talking to each other and agreeing to take the same position, but I think the former explanation is more likely). I think this also explains some of the quirky votes we see sometimes (like a big wave of abstentions on one resolution).

For me, this blows away the argument that voting disclosure would lead to dumbed-down voting. There is some really dumb voting going on already - in some cases it looks like someone fell asleep with their finger on the 'vote for management' button. At the moment - because of the lack of transparency - this kind of behaviour is not widely understood. In fact I think very few people even in the corporate governance microcosm are really aware of how rarely many asset managers oppose management. As such it's always been my view that making voting data public would at least make people more aware of who does what. It might still be the case that clients (pension funds etc) don't mind that their managers support practically everything they vote on, because they think voting has little/no value. But at least it would allow such decisions to take place from an informed position. Because there will be surprises. (As an aside I would put money on it that someone somewhere has taken voting rights away from appointed asset managers and given them to a third party with the net result that they now vote with management more often than if they had simply left voting delegated.)

Looking ahead, the more voting data that becomes available the more people like me are going to be able to identify block-voting in the market where (I believe) asset managers are simply following a third-party's advice. Just to give you an example, I have been able to spot errors in my own records of voting data because Asset Manager X was not listed as voting the same way on a given resolution as Asset Manager Y and Asset Manager Z, whereas they had been in lock-step on other votes. Put it another way, you can get a very good idea of how X will have voted by looking at how Y and Z voted. Just to remind you this could affect decisions at our largest public companies on issues like board elections, acquisitions, capital raising and so on. I struggle to see this as the responsible use of ownership rights.

It's this kind of thing that makes me very sceptical of claims that voting isn't that important. This is for the very simple reason that a lot of asset managers don't seem to have given it a proper try, ever. But it also demonstrates how much needs to change if the Stewardship Code is going to make a real difference.

1 comment:

CharlieMcMenamin said...

This post is exactly what blogging was created for: you have managed to convey an evidence grounded view on your niche area of expertise to a complete outsider like me in a way that is clear, cogent and explicitly connected to your wider policy concerns.