The background to my comments is below:
KATE BURGESS in the FT on 15 July 2018 reported that accusations of empty voting — where investors borrow voting shares for short periods to swing the outcome at meetings —reverberated around the market ahead of Premier Food’s shareholder meeting next week. They were sparked when Oasis Management , the Hong Kong activist hoping to unseat Premier’s chief executive Gavin Darby, said it had increased its stake in the owner of Angel Delight from 9 to 17 per cent as it emerged that an unusually high level of stock in Premier has been lent out. Some funds have almost certainly borrowed shares to short Premier (that is, sell stock they do not own). But short positions don’t account for all the borrowed stock.
Stock lending is part of the plumbing of markets and huge business. An EU report says that by 2007 the total value of securities on loan was $5tn, earning Wall Street $10bn in fees. The International Securities and Lending Association (Isla) says €1.5tn of stock was lent out in Europe between 2010 and 2012. It was also reported that Isla says the opacity of the voting process makes it hard to prove or disprove allegations of empty voting.
My comments are as follows:
With respect to ISLA comments (which is an industry group with many lucrative vested interests to protect) I suggest the voting process is not the least bit opaque. This is a very misleading spin – on the part of intermediaries who have built entire businesses out of ignoring the spirit of company law and trampling over shareholder rights. They blame everyone else but themselves for the messes that companies often find themselves in. They blame companies for lack of vote confirmations, for example, but every single investigation into “missing votes” around the world has identified the custodians as being the cause of the problems.
What IS ENTIRELY OPAQUE is custody and stock-lending, especially when shares are held in pooled nominee accounts. This is not the fault of the companies (issuers), it is entirely the fault of custodians and the end clients who generally do not understand what they have bought, having been told “it’s cheap” by investment consultants, who themselves only have the vaguest of notions about voting and custody.
The companies know who owns their shares when stock moves in and out of designated accounts because they reconcile to CREST regularly – as much as hourly. Custodians are only obliged by FCA custody rules to reconcile once a day. Registrars have scrutineers, lawyers and accountants crawling all over them. Why? Because of the importance of voting in the UK legal environment. In the US, it’s not so important because votes are not binding. Most custodians are US and they grafted their models into the UK about 20 years ago – and that’s when share registers went dark. This is also the reason why retail shareholders cannot easily vote (it is estimated only 6% of retail shareholders vote their shares).
The Shareholder Rights Directive aims to improve shareholder ID, but I regret that many of the custodians have fought bitterly to resist any changes that will impact their business models. Many custodians will cite costs – hogwash. If transaction fees with the CSDs are too high, then the FCA should step in.
By Cliff Weight, ShareSoc Director
21 July 2018