With today’s world markets exposed to almost unprecedented risks – corporate scandals, environmental and regulatory issues, war and Sars – institutions around the globe are constantly seeking to diversify their shareholdings. Conventional wisdom says that diversification, even if it means adding some high-risk propositions to a conservative basket of shares, will actually reduce the total risk of a portfolio.
Conversely, the Reuters Institutional Investor Survey 2002 notes that ’70 percent of companies are increasing their cultivation of non-domestic fund managers in an attempt to diversify their shareholding base.’ The reverse is also true. Increasing numbers of funds are diversifying their shareholdings not only on a sector basis, but on an international one. This trend will continue as the cost and complexity of buying shares across national boundaries diminish.
It stands to reason if companies want to attract foreign capital, they have to take into account the views of non-domestic shareholders, especially those who vote at the annual meeting. But how easy is it to vote across borders? In some countries, the legislation and corporate culture make it simple. In the US, for example, the 50 percent quorum requirement means that companies with lots of non-domestic shareholders have to encourage them to vote their proxies.
US law also requires that all registered shareholders, domestic and foreign, get their proxy cards, along with all relevant materials, well in advance of the meeting. The company has to underwrite all the expenses involved in this process, along with those of obtaining replies and voting instructions from shareholders.
‘We use ADP Investor Communication Services to ensure our non-domestic shareholders receive all the relevant material, including their voting cards, in a timely fashion,’ says Julie Cunningham, vice president of investor relations at Qualcomm. Foreign shareholders using non-ADP banks and brokers usually get their materials via proxy solicitors such as Georgeson Shareholder or Morrow.
Qualcomm’s international investors can request a legal proxy, which is sent via first class mail. ‘If the meeting is less than five days away we contact the appropriate bank/broker where the shares are held,’ explains an ADP spokesman. ‘They then provide mailing instructions and the proxies are sent overnight, where applicable.’ If international shareholders own shares through an ADP bank/broker client, they get a package with voting instructions.
In other countries, it’s rarely so simple. Non-domestic holders often find that trying to vote overseas is an administrative minefield.
Problems of custody
In most developed markets, the shareholder whose name appears on the company’s register is entitled to benefits including the right to attend shareholder meetings and vote. So investors intent on being able to vote may invest directly as registered shareholders instead of through a nominee broker.
If it’s more convenient, tax-efficient or cost-effective to invest through a custodian or some other nominee, then any potential loss of the right to vote is a cost to be considered when making the investment decision. Beneficial shareholders wishing to vote may do so by obtaining a power of attorney from the registered shareholder or, if this is a company, beneficial owners may be appointed ‘corporate representatives’. But as Jaap Winter, head of the European Union’s High Level Group of Company Law Experts, has pointed out, ‘ultimate account-holders’ may have to pursue a long and winding trail through brokers, custodians and sub-custodians if they want to be sure of the right to exercise their votes.
Ray Alvarez-Torres, director of global voting services at Institutional Shareholder Services, maintains that voting across borders forces investors to be fully informed about the voting mechanics and regulations in the markets concerned. They need to know how global custodians operate in these markets and choose the most suitable, which will often have a well-established sub-custodian network in the local market. Alvarez-Torres points out that ‘some markets such as those in Scandinavia have particularly aggressive deadlines, making voting difficult for non-domestic shareholders unless they have a sound understanding of the procedures involved.’
International investors need to ask how their custodians source their information regarding, for example, the date of the meeting, whether they conduct their own research or rely on the local custodian, how they process this information – manually or electronically – and whether they get it to investors themselves in a timely fashion.
Colin Melvin, director of corporate governance at Hermes Pensions Management, says cross-border proxy voting can be quite a challenge. ‘In some countries there are requirements for power of attorney which need to be renewed every year, and this can be time-consuming and costly,’ he comments. Elsewhere, as in the US and the UK, once the power of attorney has been set up, it remains with the nominated proxy until the shareholder asks for it to be changed.
Another issue in some countries, particularly Germany and Italy, is that of share-blocking. Only investors who own shares on the date of the meeting are entitled to vote, so if they choose to exercise their vote, their shares will be blocked from trading from the moment their voting card is prepared. Melvin says that under these circumstances, many fund managers choose to renounce their vote in order to maintain the ability to sell their shares. For the European securities community, the removal of share-blocking has become a priority.
E-voting
At last year’s International Corporate Governance Network (ICGN) conference in Milan, some portfolio managers were complaining to Domenico De Sole, Gucci’s chairman and CEO, that the company’s lack of an electronic voting platform caused numerous problems. Currently Gucci’s non-domestic investor shares are held by the Bank of New York, the company’s transfer agent. Before each annual meeting, the company sends voting instruction cards to BoNY, which forwards them to the registered holders.
Investors then return their completed cards to BoNY, which presents them at the meeting via its sub-custodians in the Netherlands, where Gucci is domiciled. Fund managers complain that the complexities and time scale of a manual process often prevent their collecting all account-holder votes in time for the meeting, so they could only vote part of their portfolios. Electronic voting would significantly reduce time pressure. However, Antonio Trabocchi, an IR associate at Gucci, admits that although the matter is under consideration, ‘It has not been thoroughly discussed yet.’
‘In order to facilitate straight-through online voting, we need an audit trail,’ affirms Hermes’ Melvin. He notes the problems Hermes experienced in one recent case in Denmark. ‘We had voted against some proposals, but after the count we were told by the registrar that our vote hadn’t been received,’ he explains. Since Hermes had not used the company-provided proxy card, it is possible the local custodian wasn’t aware of what to do with the Hermes vote. Melvin says Hermes is now trying to establish at what point in the chain its vote was lost.
Melvin believes electronic voting is the way forward if such problems are to be eliminated. ‘We would appreciate being able to transfer our vote directly to the company, cutting out the middleman at the various custody phases,’ he says.
Robert Blanks, deputy director of the UK’s Institute of Chartered Secretaries and Administrators, agrees. Pointing to Crest, the multi-currency electronic settlement system for UK and Irish securities, Blanks says he sees electronic voting as ‘an efficient, forward-looking approach.’ On the international scene, ISS has presented its VoteX service to standardize international voting on an electronic platform. However, progress towards standardized e-voting has been sporadic, and Alvarez-Torres admits that ‘it is unlikely markets will adopt a universal standard overnight.’
Blanks, Alvarez-Torres and Melvin all note that the institutional voting community has begun to expect competent and complete voting services from their banks. ‘There have been significant developments in the electronic, straight-through processing of proxies, because time frames across borders are so different that manual voting can cause votes to be lost,’ says Alvarez-Torres. ‘Nowadays, the impetus is coming from investors themselves to reduce the barriers to cross-border voting.’ Companies aiming to increase their non-domestic shareholder base should take note – as should global custodians who wish to remain global.
Proxy voting, Tokyo style
Kenya Takizawa, co-founder and partner of Japanese fund manager M&A Consulting, says the lack of financial discipline and effective board control were the deciding issues when M&A launched one of the first proxy fights by a Japanese ‘dissident’ against a local company.
The target was women’s apparel company Tokyo Style. ‘We had the greatest respect for [president Yoshio] Takano and for his family’s business acumen in women’s fashion,’ says Takizawa, adding that the company had been solidly generating cash for over 20 years. But it wasn’t using its cash – at around $1.1 bn, some 20 percent higher than its market capital – to produce shareholder returns.
‘We decided on a proxy campaign rather than bid for the company,’ comments Takizawa. ‘The latter might have enforced financial discipline, but it could have destroyed value by depriving the company of key management, particularly some members of the founding family. So we put forward our own set of financial restructuring proposals.’ These included an extraordinary dividend of $3.90 – for a total of about $400 mn – plus a buyback program for 33 percent of the shares outstanding.
Yoshiaki Murakami, president and co-founder of M&A, approached Georgeson Shareholder to act as M&A’s proxy solicitor for overseas shareholders, who held 29 percent of the company. For the first time in its history, Tokyo Style itself decided to conduct an overseas IR campaign for which it appointed London-based Citigate. ‘It was an incredibly complex process to pass the necessary documents through the various custodial layers and get them to overseas voters,’ observes John Wilcox of Georgeson. ‘The investors were not always readily identifiable from the register. Once we knew who they were, we had to identify the decision-makers, who might be the beneficial owner or a delegate. And we had to ensure that our client’s information, including the voting proposals, reached all the participants at various levels.’
Once M&A had prepared its proxy statement, Georgeson distributed English versions of the proxy statement, letters and voting instruction forms to beneficial owners and intermediaries, including cross-border processing services such as ADP or Institutional Shareholder Services and the global custodians, investment managers, other proxy decision-makers and so on.
‘If Georgeson had not been involved at this stage,’ says Wilcox, ‘the proxy documents might just have been forwarded – in Japanese only – to the sub-custodians to be sent on to the relevant parties.’ The risk was that the documents might then be translated at different stages down the chain, leading to different versions of the same document, possibly even excluding some key proposals. Georgeson’s task was to ensure all interested parties had all documents in their official form. ‘We then had to seek support from the investors,’ Wilcox says. ‘Murakami traveled the globe to make his case.’
The last and trickiest part of the campaign was to monitor the movement of voting instructions down the chain, where much could go wrong. For example, the investment manager might not have received his instructions from the fund, or the global custodian may not have received them from the investment manager. Problems often occur when instructions finally reach the local custodian, which Wilcox describes as ‘like a black hole – things often get lost’. At one point, several Japanese sub-custodians argued that the proxy cards prepared by M&A were invalid under Japanese law. Some global custodians believed it would have somehow been ‘improper’ to exercise votes through M&A proxies. In fact, Tokyo Style management accepted all M&A proxies at the meeting without contesting their validity.
In the end, 20 of the 22 percent of foreign investors entitled to vote actually did so, but about 3 percent failed to get their votes in on time, while a further 7 percent couldn’t vote because their shares were lent out. And although Tokyo Style eventually won the day, this was certainly in part because its original proposals for using its cash pile were significantly improved in response to M&A’s proxy battle. ‘What is particularly encouraging is that there were such extraordinary levels of support (for the M&A proposals) from outside Japan, from objective shareholders who were not part of the Japanese cross-shareholding culture,’ notes Takizawa. This event may well preview the growing influence of outside investors on Japan’s business culture.
