Corporate Voting – improving the voting system
What is the issue?
Australian law devolves a lot of authority to directors of public companies but some powers are rightly reserved for shareholders. Owners of a company get to vote on a range of important issues spanning remuneration, capital raisings, director elections, takeovers and constitutional matters.
Just as in politics, voting integrity matters because investors need to have confidence that, where they do have voting rights, their collective intentions are accurately captured and implemented.
The current voting system for listed companies in Australia is unwieldy and in need of reform, as was outlined in this 2012 report we prepared for ACSI: ‘Institutional Proxy Voting in Australia’. We uncovered evidence of miscounted votes, timing issues with voting entitlements, manual processes, lack of transparency and the absence of an audit trail.
A wide coalition of investors, including the Financial Services Council endorsed the need for change to protect investors’ rights in a Parliamentary Joint Commission inquiry which touched on this issue.
In response to investor submissions advocating a record date 5 days before the AGM, the Parliamentary Joint Committee on Corporations and Financial Services concluded in Recommendation 13: “The government should consult with industry on amending the record cut-off date.” Almost a decade later, very little has changed.
In many cases, the whole proxy debate is irrelevant, because many resolutions in large ASX companies are still passed by a ‘show of hands’ of those in attendance (frequently less than 1% of shareholders) rather than calling a ‘poll’ where all proxies submitted are formally counted.
There needs to be a range of transparency improvements, which would be facilitated by compulsory electronic voting and the adoption of SWIFT as the common proxy voting messaging system on the investor side. Technology can facilitate the development of a full audit trail for contested situations, which we currently don’t have. This would also assist with reforms such as electronic confirmation notices to institutional investors (or their agents) when votes have been processed. If all Australian state and federal political elections are conducted by independent electoral authorities, shouldn’t Australian investors at least be able to appoint an independent scrutineer, as occurs in the UK?
There are as many as 9 different players involved in the public company voting process – ASX, company, share registry, fund manager, custodian, sub-custodian, voting agent, proxy adviser and beneficial owner. And with a minimum notice period of just 28 days for public company shareholder meetings, the reconciliation process is currently too intensive given that instructions are received before the final eligibility to vote is determined on the ‘record date’, usually 48 hours before the meeting. Much of the pressure on system participants – and scope for errors – would be alleviated if the record date was brought forward to 5 business days before the AGM rather than the current requirement of “no more than 48 hours”. Most other jurisdictions have much earlier record dates and Australian political elections close the roll weeks before polling day. Such a reform has been previously recommended by CAMAC and a Parliamentary committee, but there has been no movement.
The principle of excluding conflicted votes on resolutions – such as executives voting on their remuneration or placement recipients refreshing placement capacity – is a good one but market practice appears to be inconsistent, particularly in relation to exclusions for investors who have themselves participated in selective capital raisings.
Our research for the 2012 ACSI report identified a wide range of practices and we revealed that exclusions on capital raisings are sometimes not observed by either the company, the beneficial owner or some of the other players in the voting chain.
Given such evidence, it would make sense for companies to be required to disclose the total number of excluded votes on each resolution in their reporting to the ASX.
There is one area in the voting system where less transparency is required, namely the ability for companies to issue tracing notices under section 672A(1) of the Corporations Act which compels investors to disclose how they voted their stock. This chapter 6 provision was originally designed to help companies identify potentially hostile shareholders building a stake, not delve into voting decisions. Given that issuers can act punitively against investors in areas such as allocations in capital raisings, the sanctity of the secret ballot should be preserved for institutional investors who choose not to publically disclose their voting practices.
- Bring the record date for voting entitlement forward to 5 business days before the scheduled meeting rather than the existing two day deadline.
- Embrace modern technology through electronic voting which creates a data base that enables an independent audit of the outcome if required.
- Empower shareholders representing more than 5% of issued capital to appoint an independent scrutineer to oversee the voting process and counting in a contested election.
- Compel the voting on resolutions at all listed company shareholder meetings to be conducted by way of poll rather than a show of hands to ensure all legitimate votes are counted.
- Standardise the application of vote exclusions on capital raisings and require issuers to disclose the total amount of excluded shares on each resolution.
- Require issuers to electronically acknowledge that the votes of shareholders have been processed or discarded and confirm to major institutional shareholders what proportion of the final results their votes represented.
- Remove the ability of companies to issue tracing notices to institutional investors requiring disclosure of how they voted at individual shareholder meetings.
After initially announcing it had narrowly incurred a first strike, the company issued tracing notices to all institutional shareholders which establishment one custodian had double counted the votes of two beneficial owners.
Emeco then commissioned an independent scrutineer to validate that a remuneration strike had instead been narrowly avoided.
Why shouldn’t shareholders be able to commission an independent scrutineer as well?
The remuneration report attracted 327.8 million proxies in favour and 110.05 million against, representing 24.3% of directed proxies. There was an additional 10 million undirected proxies but neither the chairman or any shareholder present called a poll, so the resolution was formally passed on a show of hands.
The Australian Shareholders’ Association intended to vote undirected proxies against and expressed regret at not calling a poll, instead its votes weren’t counted. Compulsory polls would prevent this from happening again.