Spotlight on Shareholder Governance |
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| February 2010 | |
Welcome
Jervis Smith
Managing Director, Global Head of Client Executive
Global Transaction Services, Citi
In January, Citi hosted two roundtable sessions on shareholder governance with institutional clients in Edinburgh and London. In this edition of Spotlight, we discuss some of the issues raised around the topics of proxy voting and class actions. In an era of increasing corporate governance scrutiny, both are highly relevant for institutional investors who are under pressure to demonstrate consistent oversight and engagement with the companies in which they invest.
Proxy voting is a key element for securing such commitment. It should be a simple process, and in some markets it is. Year-on-year, custodians are witnessing rising numbers of clients using their proxy voting services in international markets and mounting percentages of votes cast.
But, as clients made plain in both meetings, in some markets major issues involving local practice remain. Legislative changes designed to deal with them have yet to take full effect. Communications issues are also hindering the vote confirmation process. We look at the way investors are dealing with these issues and discuss the way forward.
We also highlight the challenge investors face in participating in class action settlement claims. As class action activity spreads to new markets, institutions cannot afford to miss out on settlement claims that often run into the billions. Custodians are key to recouping these claims, and to that end Citi is extending its current US settlement claims service to the international arena.
Proxy Voting: Making it Count
Elizabeth Maiellano
Senior Director, Broadridge
Three issues dominated the discussions on proxy voting at Citi’s roundtable sessions in Edinburgh and London last month: share blocking (the practice of preventing trading in shares that are to be voted in the run-up to the shareholder meeting), the recall of securities on loan and vote confirmation.
Share blocking should be a thing of the past in Europe. The European Union (EU) Shareholder Rights Directive, adopted in 2007, was designed to do away with all local impediments to voting and in particular facilitate the cross-border voting of shares by proxy. The directive provides for the replacement of share blocking and related practices through the implementation of a record date system. It should have been implemented in national legislation by every EU member state by Tuesday 3 August, 2009.
At the last count, a handful of countries still had to complete the process. Among them were Sweden, where physical attendance at a meeting is still required if a shareholder wishes to vote. Some countries, such as Italy, are currently discussing the legislation.
Germany is one of the countries that has transposed the directive into its legislation. But the practice of share blocking goes on. There are markets, like Germany, where the legislation has eliminated share blocking but local market practices continue unchanged. We are working with issuers to introduce practices in line with the legislations in which they work.
How do investors deal with this issue?
Among those attending the roundtable discussions, several preferred not to vote rather than lose their ability to trade - unless the stake was strategic. Some voted a portion of their holding, giving them the flexibility to trade the rest. Much depended on the size and importance of the holding.
The second area of discussion centred on the recall of shares on loan to enable the owner to vote. While some firms routinely recalled all shares ahead of meetings, others carried out a cost/benefit analysis to assess whether this was worth doing. Costs included not only lost revenue but the direct expense incurred in voting in countries such as Japan, Sweden and the Netherlands. The benefit side of the equation focused mainly on the size of the holding in relation to market capitalisation.
The final issue - vote confirmation is one of the hottest in the industry right now. Investors complained that, in a number of markets, they often had no way of knowing whether their votes were actually lodged. Large holders were often in direct contact with the company in question. But in many other cases vote confirmation was haphazard.
Problems in the Chain
The key problem is the number of intermediaries in the voting chain. Custodians, proxy service providers, vote agents, sub-custodians, registrars and transfer agents may all play a part in the process. All must agree on the voting entitlement and process the vote instruction as directed to allow the vote to be accepted and then passed through to the next link in the chain. Vote confirmation requires the information to pass in the opposite direction - but it needs the active involvement of the registrar to set the process in motion.
Moreover, SWIFT’s new corporate action 20022 standard incorporates a message for vote confirmation. With no free form text it facilitates straight-through processing. The problem is that it needs the participation of all entities in the communication chain and these same parties have to take some ownership of the process. The majority of financial institutions have yet to embrace SWIFT 20022 but the new standard surely marks the way forward.
The roundtable discussions showed that investors still face a number of difficulties in making their votes count in international markets. But new legislation and improved communications standards are set to remove a number of the obstacles within the next year or two. Citi is committed to working with its clients to deliver the benefits at the earliest opportunity.
Class Actions: Turning Risk into Opportunity
Jane Kenyon
Director, Global Custody Product Management
Global Transaction Services, Citi
One of the biggest corporate governance challenges is in tracking and filing for class action settlements and pursuing claims. Every year, there are literally thousands of notices relating to class actions, most of them in the US. They can issue from courts, law firms or claims administrators - or appear in a variety of publications. The number of different sources runs into the hundreds.
Even when a class action settlement is spotted, investors face a dual challenge in making a valid claim. They must pull together a complete transaction history in the relevant security or securities over the time period concerned and they must make a filing in accordance with the correct procedure. This can be a daunting task. The Enron case, for instance, involved 160 different individual issues.
Without consistent systems in place, many institutional investors are simply not able to respond. Where they do, the process can be time-consuming and costly. Follow-ups are frequently needed to deal with claims administrators’ queries.
Navigating the Right Path
There are some strange wrinkles in the rules. One issue raised in the recent roundtable meetings concerned in specie transfers. Where securities holdings are the result of such transfers they are not taken into account when calculating a class action settlement claim. This adds further complication to the historical transaction research needed to make a claim and is seen as inequitable.
Even where an investor is successful in making a claim, reconciliations can be arduous. Administrators tend to make their payments via multiple cheques. There have been cases where those cheques are out of date by the time they are received.
According to recent studies, more than half of institutional investors that are eligible to participate in settlements fail to file claims. "As class action lawsuits grow increasingly larger, investors are leaving hundreds of millions of dollars on the table," says Jane Kenyon, Global Custody Asset Servicing Product Manager for Citi’s Global Transaction Services. At the last count, some US$9 billion in class action settlements and civil penalties awarded by the US courts were still unclaimed.
This can be dangerous. Increasingly, the monitoring of class action litigation and settlements is viewed as part of an institution’s fiduciary responsibilities. Failure to claim a payout can invite criticism at best, or litigation at worst. In 2005, a group of 40 US mutual fund managers was sued for more than US$2 billion in unclaimed class action settlements.
Not Just the US
It is not necessary to be an investor in US equities to have an interest in US class action proceedings. Non-US companies have figured prominently in the list of targeted names in recent years in the US courts. They have included European companies such as Parmalat, Royal Dutch Shell and Royal Ahold, and Canada’s Nortel Networks.
At the same time, the class action bug is spreading beyond US shores. The legal systems of Australia and Canada have long permitted class actions and group litigation has been possible in the UK since 2000. More recently, new laws in Germany and the Netherlands have similarly led to collective action on the part of investors or their representatives. Activity has also been tracked in Taiwan. The challenges posed by class actions is getting bigger all the time.
Partnering for the Future
Institutional investors can outsource the process to a specialist vendor. For many institutional investors, the natural course of action is to turn to their custody provider, which as the registered holder of the firm’s securities already has all the relevant data on purchases and sales to hand. As a rule, global custodians have the staff in place to manage the claims process from start to finish. They will gather settlement notices, interrogate client trading data, file claims on the client’s behalf, collect cash distributions and track the entire claims process.
At Citi, we are in the process of extending our US class action service to cover other world markets, starting with Canada and the Netherlands. Other countries will follow as local market activity demands. Clients will be able to offload the entire claims process, leaving them free to concentrate on strategic activities.
By using Citi’s class action service, clients avoid the need to buy vendor sources, are relieved of all research and filing responsibilities - including interacting with the Claims Administrators on enquiries and follow-ups. Citi’s service is differentiated by its online ability to provide all filing data as well as allowing clients to track and monitor each case online through to the processing of distributed payments to client-designated cash accounts. There are a variety of flexible service options from notification through to claim completion and collection of compensation.
We are also working on behalf of investors to improve and standardise the settlement claims processes for class actions through the Bank Depository User Group (BDUG), a forum for the bank depository member community. The BDUG Class Action Focus Group, co-chaired by myself, works to develop rules and guidelines for handling class actions and put forward standards for class action announcements, proof of claims filings and payment processes. As a consequence of feedback received at the recent roundtables, Citi has promised to raise the issue of in specie transfers, mentioned above, at the next meeting.
One thing is certain: the class action landscape is set to become ever more complex and more difficult to monitor. Institutional investors are at risk if they fail to focus on this issue. With the right partner to manage the process for them, they can turn that risk into an opportunity.
