Putting the case for direct public company voting

Let's have a vote: put your hand up if you reckon that last time you filled out a proxy form for an annual general shareholder meeting, you actually voted on the issues at hand.

If you appointed the chairman of the meeting as your proxy, you can leave your hand up: you're probably right. Following recent amendments to the Corporations Act, the chairman is obliged to vote all proxies he or she receives, and to vote them as directed.

But if you appointed anyone else as your proxy, put your hand down. You don't know for sure. You can't know for sure. When you appoint a proxy who is not the chairman, you have no guarantee whatsoever that your voting wishes will be respected.

It might come as a shock to many shareholders, but filling out a proxy form does not constitute a vote. Chartered Secretaries Australia (CSA), the professional body representing Australia's company secretaries, says filling out a proxy form merely means you delegate some of your rights as a shareholder - including your right to vote - to a third party. But that third party can take considerable liberties, or make simple errors.

Soliciting for proxies is legal - someone with a vested interest in an issue could actively ask other shareholders to appoint them as proxy. How they then behave is up to them.

For example, if you choose to vote "for" a particular resolution, the proxy you appoint (assuming they are not the chairman of the meeting) can abstain from voting on that resolution. They can't reverse your voting intention - they cannot, for example, vote "against" if you choose to vote "for" - but they can choose not to register your vote, which can have a significant impact on the success or failure of a particular resolution.

It's a process called "cherry picking". The explanatory memorandum to the Corporations Amendment Bill (2006) says cherry picking is "a practice whereby a proxy holder, with directed proxies, chooses not to vote the directed proxies for a motion, but chooses to vote the proxies directed against a motion (or vice versa)".

The proxy "deliberately withholds some votes that are contrary to their personal views, but lodges other proxies favourable to their views".

"This disenfranchises shareholders and may unfairly influence the outcome of voting in a poll," the memorandum says.

The right to vote is a fundamental right as a shareholder, as fundamental as the right to share in the profits generated by a company. But CSA's members know from first-hand experience that problems occur with proxy voting. It's more difficult to say if the problems are caused accidentally or deliberately.

It's possible a proxy you appoint might not make it to a particular meeting, or that they miss a vote for another reason. Sometimes meetings are adjourned, and your proxy might not be able to attend a rescheduled meeting.

CSA argues that by introducing direct voting, these problems, and more, can be eliminated in one fell swoop. It says direct voting does not need legislative change, and it can be introduced with minimal cost and complications for companies.

It would tidy up misunderstandings over how and when it's appropriate to appoint a proxy - and who that proxy should be. And it would create a clearer link between the owners of a company - that is, its shareholders - and the board.

In short, it would make voting on company issues the same as other forms of voting with which we're already familiar. After all, if you're voting in a federal election you don't appoint, say, the president of the Liberal Party or the ALP a proxy, and ask them to cast a vote on your behalf.

Tim Sheehy, chief executive of CSA, says direct voting "gives shareholders - and it's really a retail shareholder issue - what they thought they always had, but didn't".

"It does that because it removes the agency arrangement," he says. "When filing a proxy, there's no guarantee your intention will be counted, unless your proxy is lodged with the chair."

Sheehy says direct voting is not designed to replace proxy voting, but rather to co-exist with it. He says problems with proxy votes happen intermittently, and they usually cause most trouble when shareholders are voting on contentious issues. He says if companies implement direct voting now, they can effectively make AGMs and shareholder voting future-proof.

Two companies, Telstra and Australian Foundation Investment Company (AFIC), have already taken steps towards implementing direct voting. CSA has issued a "how-to" kit to all other listed companies, outlining how they can do it, too.

Sheehy says it's unlikely a company with a December 31 balance date could implement direct voting before its next AGM, but "it's perfect if you're a June 30 company".

Sheehy says CSA is not aware of any other country that has direct shareholder voting, so this would be a first.

Global fund managers are watching this exercise with interest. UK fund manager Hermes Pensions Management, which has #61 billion ($152 billion), and a further #10 billion under advice, has voiced its approval of the idea. In a response to the CSA discussion paper, a director of Hermes, Paul Lee, describes direct voting as an "innovative premise which we believe deserves international interest and consideration".

"A move to direct voting would bring what are frankly antiquated legal structures more closely into line with the modern realities of shareholding arrangements and make use of available technology," Lee says.

"We do agree in principle with the introduction, alongside proxy voting, of a direct voting method; we do believe that this would have positive implications for shareholder participation, particularly in jurisdictions where show of hands voting remains prevalent; we believe that the CSA paper captures the principal benefits of this direct voting proposal; and we can think of no particular disadvantages to direct voting."

Lee says there should be further consideration given to what happens if an annual meeting is adjourned, or if there's a threat that the meeting might be adjourned.

"In such cases it has not been clear under English law whether the powers of a proxy extend to voting in relation to such an adjournment proposal; this meant that many institutions felt obliged to attend through corporate representatives to ensure the meeting could continue as intended," Lee says.

"It would seem to us very important for any method of direct voting to restrict - indeed to prevent entirely - or to allow some scope for responding to such last-minute proposals such that the will of the majority of shareholders, who have expressed their view by direct vote, are not interfered with by a smaller group of shareholders personally present at the general meeting. It may be that the implication of this concern is that proposals to adjourn meetings can be brought only by the chair of that meeting, and that no other last-minute proposals may be brought forward by anyone. It would seem to us that any alternative structure risks disenfranchising the substantial bulk of shareholders."

What opposition there is to the direct voting proposal seems to be motivated by concerns that annual meetings might become redundant. The Australian Shareholders Association says it sees "a risk that if the votes are already predetermined prior to the meeting, the less shareholder-friendly companies will not engage with their shareholders at the AGM". "In such a case we would see attendance fall as shareholders perceive a cavalier attitude by the board," the ASA says.

Shareholder activist Stephen Mayne says he broadly supports the idea of direct voting, and says concerns like that of the ASA could be addressed if direct voting enabled shareholders to vote after an annual meeting has been held.

"The current system is very cumbersome," Mayne says. "I think there are some technological challenges with direct voting, like how you close [voting] off, and those things, but I think there are other, more pressing things that it can help.

"One of the most important things would be to keep voting open until after the AGM. The vast majority of AGMs are dead rubbers - it's the equivalent of having a televised [political] debate after the election."

Mayne says direct voting would also avoid the problem of "missing proxies". He says fund managers have reported on occasion that when they see published results of votes cast for and against resolutions at annual meetings, the number of votes against a particular resolution has been less than the number of "against" votes the managers themselves thought they'd cast on their own.

Mayne says there might or might not be anything sinister in these occurrences - there are several parties involved when an institution votes, including the fund manger, custodian, beneficial owners of the shares in question - and that it's not entirely surprising that it happens.

"It's just not accurate, and votes go astray because there are so many links in the chain."

A large number of us are shareholders - an estimated 44 per cent of the adult population holds shares directly, as opposed to holding them through vehicles such as super funds or other managed funds - and we're regularly asked to vote on a range of issues.

However, "it's a common misapprehension that appointing a proxy to exercise the shareholder's vote is a direct vote", says CSA in a discussion paper, Expressing the Voice of Shareholders - A Move to Direct Voting.

"Shareholders do not necessarily appreciate that they are temporarily only transferring some of the rights attached to membership to another party, especially the right to vote or to make a decision not to vote," it says.

"Voting by appointing a proxy does not provide the most transparent vehicle for expressing the voice of shareholders."

CSA says it is "important to remember that, in appointing a proxy, corporate representative or attorney, the relationship between the shareholder and their representative is primarily governed by agency law".

"This relationship sits alongside the relationship between the shareholder and the corporation, which is governed by contract and the corporations law," the CSA paper says.

"Given that the appointment of a proxy to cast a vote interposes the law of agency between the shareholder and the corporation, it is by its nature indirect. At a time of renewed interest in shareholder participation, it is difficult to see how retaining the appointment of a proxy, corporate representative or attorney as the only form of absentee voting assists shareholder democracy.

"Under current legislation, a shareholder can appoint a proxy to vote and direct the vote, but the proxy holder can elect not to vote (apart from the chairman, who is obliged to vote as instructed).

"CSA acknowledges that the Corporations Amendment Bill (2006) seeks to address this anomaly, but loopholes still remain."

Copyright © 2022 The Mayne Report. All rights reserved

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