SALONI SURI, Shareholder Analytics and Investor Relations

The Scenario

We’ve all seen it; a company in the midst of a contentious voting situation at an AGM with management nervously waiting on the final proxy vote count. Less than 48 hours before proxy voting is due to close, a significant portion of the total votes are lodged with the Share Registry by its Registered Custodians and, alas, what looked like a close ‘win’ is not all good news. By this point it is often too late to identify, influence and ultimately reverse the required number of votes to push the Resolution over the line.

You can imagine the conversation following the proxy vote count; ‘If only we knew how these few investors were going to vote, and we could have at least had a conversation with them to try and flip their view.’

Increasingly, corporates are learning there is a way to identify voting instructions given by beneficial shareholders, well in advance of the Share Registry receiving them. Institutional Vote Tracking leverages the information provided under s.672 of the Corporations Act 2001 (used for Register Analysis) to identify the voting instructions lodged by beneficial shareholders. These instructions are picked up in real time, often weeks in advance of the proxy voting deadline.

The Institutional Voting Process

First things first – how does the institutional voting process work? Simply put, the decision makers submit their proxy voting instructions to their immediate custodian who will pass it up the custodian chain until it reaches the registered custodian (e.g. HSBC, Citicorp, National Nominees, JPMorgan, BNP Paribas etc.). Meanwhile the registered custodian collects proxy votes from all of its underlying clients (a collection of sub-custodians, fund managers, beneficial owners, Prime Brokers etc.). These votes are collectively lodged with the Share Registry immediately prior to the proxy voting cut off, ensuring the registered custodian need make only one proxy voting submission.

That is the how – what about the who? Is it the fund manager or the beneficial owner who makes the voting decision? The short answer is – of course – it depends. While some fund managers’ mandates include voting rights over all (or a portion of) shares, some mandates stipulate investors are afforded only the right to buy and sell securities while the beneficial owner retains all the voting rights. In other situations, the beneficial owner may delegate or revoke voting rights on a case-by-case basis.

The Changing Voting Landscape

The voting landscape in Australia has changed significantly over the years. With the increase in shareholder activism, the threat of a negative vote (particularly relating to the Remuneration Report or the quality of ESG disclosures) is higher than ever. Alongside this is the growing level of engagement from large passive investors around votes as they realise the sizeable influence they carry in promoting their longer-term views. Also Australia’s largest superannuation funds are tending to revoke voting rights from external fund managers so they can vote directly with a view on what is best for their individual members. With various parties interested in (at times) conflicting outcomes, there is no such thing as a guaranteed result.

Why Track Votes?

The major benefits of vote tracking include:

Identifying negative voting instructions in time for action

Vote Tracking allows a company to identify voting intentions as early as possible rather than waiting until registered custodians lodge their final votes with the Share Registry and ensures there are no negative surprises. This allows plenty of time to re-open dialogue with shareholders in order to understand the reasoning behind their vote and even persuade them to reverse their decision (or abstain from voting) in certain circumstances.

Knowing exactly who votes in which direction

Crucially, when we identify Voting Instructions we do so at the fund level. This gives important insights into whether it is the beneficial owner (i.e. the fund) or the investment decision maker (i.e. the fund manager) influencing the voting decision. Therefore, executives can ensure they spend their valuable time talking to the right people.  This level of detail is of significant value going forward and may help identify the investors who possess a higher risk of selling their holdings.

Maximising time for forward-preparation

With a contentious Resolution, Vote Tracking will provide valuable pre-warning as to the likely voting outcome. This knowledge is vital from an IR and Media messaging perspective – giving a company time to develop appropriate communications strategies ahead of a negative voting outcome.

Monitoring shareholder voting patterns over time

With pre-AGM governance roadshows now a standard feature of ASX300 companies annual engagement programme, collecting the data on how each of their beneficial owners votes each year is essential. The only way this can be done reliably is through tracking the lodgement of their voting instructions with custodians in the lead up to the AGM. The custodian aggregates all instructions received from their clients and makes one lodgement 48 hours before the AGM. It does not keep the individual voting instructions once completed so it is impossible to identify, after the AGM, how each beneficial owner has voted.

Ensuring no procedural errors

Today’s voting process is heavily reliant (still!) on faxes for the submission of proxy voting instructions. This by extension means a reliance on manual data transcription and unsurprisingly, this can result in errors from time to time. Vote Tracking helps ensure no information is lost, misunderstood or misinterpreted during the transmission of proxy voting instructions.

There have been times where FIRST Advisers’ vote tracking has proved invaluable to our clients. In one instance a client faced the unexpected problem of their largest shareholder (representing approximately 15% of issued capital) voting against several Resolutions, including approving the Remuneration Report. FIRST Advisers reached out to the shareholder – with whom our client had a very positive relationship – and were advised we must have been mistaken about their voting intentions. It turned out it was the shareholder’s nominee who had misinterpreted the investor’s instructions and registered their vote against the Resolutions, rather than in favour! As we were able to identify the procedural error early enough in the voting process, we were able to get the mistake corrected with plenty of time prior to the voting deadline, much to our client’s relief.

Conclusion

The damage created by an unexpected negative vote on a Resolution can spell disaster. A company monitoring its institutional proxy votes has the intelligence and forewarning of a negative vote and therefore has a number of possible actions it can take to limit the damage of this outcome. Acting early to try to reverse an investors decision or correct a procedural error can often be enough to get a close Resolution over the line. In the event the Resolution is lost a well-informed management team has the opportunity to plan the appropriate communications strategy in response to this outcome.