The dark side of proxy voting

Nathan Tinkler's attempt to unseat the Whitehaven board is a reminder of deep flaws in Australian institutional proxy voting. Outdated systems must be reformed to protect shareholder democracy.

The vote count at Whitehaven's AGM today has the potential to be a white knuckle ride, if Nathan Tinkler can leverage his 19.4 per cent stake, and that of proxy voters to remove Chairman Mark Vaile and four directors.

When it comes to such crucial decisions, every vote counts. But in Australia, the systems in place to process shareholder votes leave much to be desired.

The systems to lodge and count shareholder votes at ASX 300 companies would create an outrage if they were applied to Australian political elections.

The electoral roll could be finalised after polling day and postal votes would routinely fail to arrive. Incumbent office holders could rule on the validity of votes without the presence of an independent scrutineer. About 70 percent of the time, the final result would be decided by a show of hands from one percent of the electorate; at a meeting where the sandwiches on offer afterwards held more interest than the candidates on the ballot.

While researching the corporate proxy voting system for a recent report on institutional proxy voting in Australia we observed all of these flaws. We analysed a sample of institutional votes relating to $181 billion of securities and discovered that the systems used by both investors and companies are poor.

While only a handful of proxy votes did not arrive at their destination, any vote that goes missing is one too many. Given the lack of formal checks and balances, it is amazing that the system works as well as it does.

This isn’t an arcane issue. Australian investors are blessed with the right to hold listed companies to account through a shareholder vote. Votes are valuable, both as a feedback mechanism to signal discontent and as a sanction to remove a board that isn’t performing. Votes are also valuable in the context of corporate transactions.

For example, the controversial $2.1 billion takeover of ConnectEast by a scheme of arrangement required 75 per cent of shareholders to vote in favour of the compulsory acquisition of all securities.

Our research combined the voting instructions of 23 institutional investors (roughly one-third of all institutional holdings) and compared them to the results declared in 370 meetings held throughout 2011.

We found hard evidence of seven errors caused by investors’ agents not delivering the correct votes at the correct time and two errors of misprocessing on the part of companies and their registries. Just last week, Pacific Brands reported that 101 million shares were mistakenly voted against a resolution as a result of a manual error by a custodian.

We also uncovered 52 resolutions where our limited sample comprised more than 80 per cent of the disclosed against votes but less than 40 per cent of all votes counted.
If the votes of investors outside the sample followed the voting patterns of those for whom we held data, then there are grounds for cautious concern. There might be more votes missing than we could uncover.

We found a series of gaps in the system that we hope can be addressed in the Corporations and Market Advisory Committee review of the AGM and Shareholder Engagement which will report to the parliamentary secretary to the Treasurer, Bernie Ripoll, in 2013.

Many problems are caused by time pressure, resulting from the deadline for the submission for proxies coinciding or pre-dating the stage at which an investor’s vote entitlement is determined. For institutional investors who are trading daily, shifting positions late in the process can result in inaccurate vote instructions and vote rejections. A simple solution, which has widespread support, involves specifying an earlier "record” date to determine voting entitlement 5 days ahead of the meeting to give all parties time to work out just who owns which shares.

Global registry giant Computershare reported to us that only 17 percent of total proxies are submitted electronically, with the remainder arriving by a disturbingly high level of paper and fax. This is hardly a 21st century technology.

Investors are unaware if the proxies they send off are actually processed because there is no audit trail or confirmation protocol in place. This can be reversed by compelling companies to make an electronic acknowledgement of what has been processed or rejected and announcing the results to market.

Right now, 70 percent of resolutions are passed on a "show of hands", which effectively excludes proxy votes cast and gives one vote for each shareholder physically present in the meeting. This results in low transparency and disenfranchises institutional shareholders who cannot typically attend meetings.

There is also a large element of trust placed in companies to accurately count their own votes. In the vast majority of cases, this confidence is justified. However, in closely contested situations, investors would benefit from the additional transparency that would flow from the ability to appoint an independent scrutineer to oversee or review a poll.

The parties involved in the counting of shareholder votes do the best job that they can. However, CAMAC should support reform as the ownership rights of investors are far too important to leave to the mercy of outdated systems and goodwill. We all benefit from reliable and robust infrastructure when it comes to political elections. Shareholder democracy should be no different.

Dean Paatsch and Simon Connal are principals at institutional governance advisors Ownership Matters.