Tuesday, 10 July 2012

Who votes at AGMs and other shareholder meetings?

The underlying hope when you invest in shares is that the company will be run well and that it will realise it's full potential. That is often why we look at prior performance of management and how the company has been managed in the past. This is also why the share price tends to react so strongly when there is a management change (especially of a key figure like the CEO or CFO).

Given the level of importance that this implies it seems a logical link therefore that shareholders would take a significant degree of interests in shareholder meetings, annual general meetings and any other chance they have to vote their shares for the option that would yield the best outcome for them. Given the control that the board has over management (especially in choosing the right management and monitoring them) it seems logical therefore that shareholders would spend time finding out about the board members and who is right for the company.

All of us who invest in shares on a personal (i.e. retail) level know that this is never the case. In fact the point was driven home to me yesterday when I received the AGM voting forms for Macquarie Bank (MQG), an investment that has lost me significant amounts of money over the years and theoretically one which I should be the most passionate about agitating for change in. What I did though was look at the voting forms and then throw them straight in the bin!. As I did this I found myself wondering if I was the only one. I called several of my friends who are active investors and work for financial services firms (and who presumably has a better understanding of the companies they invest in than the 'common punter') and they all said they did exactly the same thing as I did.

The question then really is: who actually does vote at shareholder meetings? And on a related note why don't retail shareholders vote? For the rest of this post I'll cover the first point and the second I will leave for a later post.

The simple answer is that it is the institutions that vote at shareholder meetings.
  • They are forced to by a combination of laws that require them to (in the US) and the need to explain to their investors why they are not taking a greater interest in the companies they are investing in if they don't.
  • Institutions often vote through firms which are known as proxy advisers. These advisers (such as ISS and Glass Lewis) provide advice to institutions (for a rather hefty fee) on what they think the institution should vote for on every resolution.
    • I have heard from several sources (though have no real proof) that many institutions just go along with the advice of their nominated proxy advisor and never question and probe the issues surrounding remuneration and the choice of directors.
  • This gives the proxy advisor a ridiculous amount of power (in my view). Strangely enough if you look at the voting patterns of proxy advisers they rarely seem to vote against resolutions (even for companies that are obviously being managed badly).
  • While I have never heard anything to suggest that the advice they give is coloured by any factors other than the interests of shareholders, the voting patters coupled with the fact that they provide advice for a fee to companies on remuneration structures means that I question how 'independent' their advice truly is.

The other major class of shareholders that vote are shareholders that hold a significant stake in the company.
  • These are often the founders of the company or management who have built up a significant stake by being involved with the company over a very long period of time.
  • These are often the shareholders that effectively 'control' the company and I think are the ones that retail shareholders need to be most careful of.
  • The real danger is that there is limited accountability for the management teams and boards. If they know that they are making one particularly powerful shareholder happy that is all that matters.
    • This is particularly a problem when there are related party transactions (i.e. the company is buying an asset from the major shareholder), shareholder approval is not required and the board is confident of their position because of that major shareholders support. Because of a lack of engagement from retail shareholders and many institutions these large shareholders can control the company with as little as 20 - 30% of the voting stock.

Thus those who do vote for company resolutions are institutions, proxy advisers and large controlling shareholders. The lack of retail shareholder engagement oftentimes means that company's do not make decisions that are in their best interests. This is no surprise to anyone but it has to do with the apathy that retail shareholders have when it comes to making decisions relating to the company. Next time I will cover the reasons why retail shareholders don't vote.

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