Policy Issue – Employee Shareholder Voting

Employee Shareholder Share Voting

July 2022

drafted by Professor Michael Mainelli

A share comes with a vote.  A share vote has value.  Employee shareholder voting can be impaired for a variety of reasons, most notably when employee shares are being managed by an intermediary.  A common initial intermediary is an employee ownership trust (EOT).  In turn, EOTs commonly use an investment manager.  Various institutional investors, such as insurers or pension funds, may also hold portions of employees’ investments that may include their employers’ shares.

In many cases the employee vote is transferred or ‘lost in administration’ to the institutional investor and the value unrealised.  One can argue that institutional investors should be more properly termed ‘institutional agents’.  Some institutional agents recognise this and make efforts to vote shares ‘responsibly’.  Their opinion of responsible.  Some institutional agents attempt to understand the voting that the ultimate beneficial owners desire and vote accordingly.  Accordingly can be in line with the majority, or in proportion to the sample.

A further example of ‘lost in administration’ is stock lending:

1 Can lenders vote in an AGM/EGM whilst stock is on loan?

No. Stock lending is in one sense a misnomer: it involves the transfer of title, including voting rights; indeed securities are often borrowed in order to settle an outright sale, so that the securities pass onto another outright owner. But borrowers have a contractual obligation to return equivalent securities to lenders on demand. Lenders therefore treat securities loans as temporary transactions, which do not affect their desired holding in a stock. In the case of votes, lenders have the choice whether to recall ‘equivalent securities’ in order to vote their entire ‘desired holding’, or to leave stock on loan, forgoing the right to vote. (Although, this does not mean that votes are necessarily ‘lost’ in aggregate, as the new owner may choose to vote.) If they select to leave the stock on loan, they have no means of controlling or knowing how the current owner might vote. This choice boils down to whether the benefits of voting are greater than those of lending. It is worth noting that returns to lending often increase around key corporate actions. Investors make their own choices.

2 If not, can lenders recall stock to vote, and does this affect their reputation as lenders?

It is quite common that lenders retain a buffer when lending stock, so they can always go to or vote in an AGM/EGM whilst stock is on loan. However, if they wish to vote all their holding, they must recall the lent securities. If a borrower is still holding the stock (i.e. it has not yet been used to fulfil short-sale obligations), lenders may ask them to vote the stock on their behalf.

http://www.asla.com.au/info/LongSecLendingPaper.pdf

The shareholder voting problem is well known, if ignored.  Is this an area where the Esop Centre could help?  There appear to be two areas worthy of discussion:

1. a policy statement might set out the need to consult employees before voting on their behalf.
2. a policy statement might set out a technological approach, such as using transferable votes to realise the full value for employees.

• Eric Posner’s quadratic voting proposal –https://chicagounbound.uchicago.edu/law_and_economics/643/
• PIRC – https://www.pirc.co.uk/website/
• Georgeson – https://www.georgeson.com/uk
• Blockchain voting trial – https://www.broadridge.com/press-release/2017/broadridge-j-p-morgan-northern-trust-and-banco-santander-complete-proxy-vote-solution
• NASDAQ trial – https://bravenewcoin.com/insights/nasdaq-to-simplify-proxy-voting-process-for-shareholders-with-the-blockchain

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