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Hidden Agendas in Shareholder Voting: Synopsis
Nothing in either corporate or securities law requires companies to notify investors what they will be voting on before the record date for the meeting. In a forthcoming paper, we show that, overwhelmingly, they do not. The result is “hidden agendas”: for 88% of shareholder votes, investors cannot find out what they will be voting on before the record date. This poses an especially serious problem for investors who engage in securities lending: they must decide whether the expected benefit of voting exceeds the expected benefit of continuing to lend their shares (or making them available for lending) without knowing what they will be voting on. All investors who engage in share lending are affected, but the problem is particularly acute for large investment managers that have fiduciary duties related to voting. At present, they must discharge these duties in the dark.
We propose a simple amendment to the Securities and Exchange Commission’s proxy rules that would solve the problem of hidden agendas: a requirement that public companies file proxy statements at least five days before the record date for the meeting. This simple change would give investors the information they need to make an informed decision about whether to retain the right to vote or not. If we believe that shareholder voting is important, and that investment managers and others should make informed decisions around voting, we should give them the information they need to do so.
Despite the centrality of shareholder voting to corporate governance, the rules and practices that hold them together can seem like a hodgepodge of corporate law rules, securities regulation, and market practices. The intersection of these rules and practices can lead to peculiar outcomes. Our paper focuses on one such outcome. While companies are free to publish a meeting’s agenda before its record date, there is no requirement that they do so. We find that, overwhelmingly, they do not. Our empirical analysis demonstrates that for 88% of shareholder votes, investors are unable to find out what questions they will be voting on in time to decide whether they wish to vote on them. We refer to these situations as “hidden agendas.” We note that our use of this term does not suggest that these companies have an ulterior motive for not disclosing their agenda prior to the record date; only that their agendas are not publicly available.
Hidden agendas are not a problem for “buy-and-hold” investors who hold their shares for the long term. These investors will be entitled to vote because they own their shares on the “record date,” typically about 55 days before the meeting. If these investors decide that voting isn’t worth the trouble, they can simply decline to do so when the time comes. But hidden agendas do impact investors that must transfer ownership of shares prior to the record date in order to vote. For the 88% of votes with hidden agendas, these investors must make their transfer decisions in the dark, without knowing what they will be voting on.
This is a particularly acute problem for share lenders. This group includes some of the most important players in the corporate governance landscape. Share lending plays an important role in the capital market, both facilitating the settlement process and improving market pricing by enabling short selling. Although share lenders have a bona fide economic interest in the company, they are not “owners” for the purposes of proxy voting. In order to vote, investors that have lent their shares must recall them before the record date.
Share lenders value voting rights: we find that the number of shares available to lend falls sharply a week or two before record dates before jumping back up the day after the record date. But because of hidden agendas, the overwhelming majority of these recall or withdrawal decisions, and the concomitant decisions not to recall or withdraw, are currently being made in the dark. This is likely to lead to costly errors regarding which shares worth recalling or withdrawing to vote, and which are not.
Hidden agendas are a particularly vexing problem for investment managers that advise mutual funds and retirement plans. These investment managers not only engage in a significant amount of securities lending on behalf of their advisees, but they also have legal duties regarding their proxy voting decisions. Current rules require these investment managers to evaluate whether voting would be in the interest of their clients. Not having access to the agenda means that these investors must decide whether or not to vote without the information that is most important for that evaluation. Hidden agendas are thus likely to lead to errors in recall or withdrawal decisions—investment managers may either fail to vote on matters that might increase shareholder value, or unnecessarily reduce investor returns by foregoing lending revenue.
Fortunately, there is a straightforward solution to this problem: The SEC should require that proxy statements be filed at least five days before the record date for the meeting to which they relate. This solution is simple, easy to implement, and superior to alternatives that would operate through either state corporate law rules or private ordering. We suggest three approaches that companies could take to comply with our proposed rule, allowing them to choose the one that is best suited to, and least costly in light of, their particular circumstances.
Hidden Agendas in Shareholder Voting: Bring Your Questions and Information
Are hidden agendas in proxies only a problem for investors that lend securities?
Investment Managers: Are “hidden agendas” a real problem? How do you deal with it? Do you typically recall all your shares for voting if you engage in share lending or do you recall none of your shares? Recall by company? How do you try to anticipate what issues will be on the proxy?
Shareholder Advocates: Is this a topic worthy of shareholder proposals? Such proposals could be easily drafted to ask that boards file their proxy or a PRE 14A at least 5 days before the record date. What are other options for private ordering or to demonstrate investor interest? Would you be interested in filing or voting for such proposals?
Hidden Agendas in Shareholder Voting: About the Authors
Scott Hirst is an Associate Professor of Law at Boston University. He teaches Corporations, Corporate Governance, and Mergers & Acquisitions. His research seeks to explain phenomena in corporate law, securities regulation, and related areas, and to inform policy making on these subjects. His work aims to combine empirical methods and conceptual analyses from finance, accounting, and economics, with close attention to the institutional environment within which corporations and investors make decisions. Prior to joining BU Law, he served as Research Director of the Program on Institutional Investors at Harvard Law School and practiced as a Senior Associate in the mergers and acquisitions group of Shearman & Sterling LLP in New York. He received Doctor of Juridical Science (SJD) and Master of Laws (LLM) degrees from Harvard Law School, and Bachelor of Laws and Bachelor of Commerce degrees from the University of Queensland in Brisbane, Australia.
Adriana Robertson is the Donald N. Pritzker Professor of Business Law at the University of Chicago Law School. Her research interests lie at the intersection of law and finance, including securities law, capital markets regulation, corporate finance, and business law. Before joining the University of Chicago Law School, Adriana held the Honourable Justice Frank Iacobucci Chair in Capital Markets Regulation at the University of Toronto Faculty of Law, with a joint appointment in the Finance area at the Rotman School of Management. In the autumn quarter of 2019, she was the Daniel R. Fischel and Sylvia M. Neil Distinguished Visiting Assistant Professor of Law at the University of Chicago Law School. She has also held visiting professorships at NYU Law School and Yale Law School. Adriana holds a BA from the University of Toronto (Trinity College), where she was awarded the Lorne T. Morgan Gold Medal in Economics, a PhD in Finance from the Yale School of Management, and a JD from Yale Law School.
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