Articles, Thought Pieces
The history of proxy solicitation
The Changing Nature of Share Ownership
Proxy solicitation has been practiced since the 1930s and has evolved to reflect the changing nature of share-ownership, the proliferation of disclosure and regulation, and the changing expectations of shareholders. The loosening of the binds in the twentieth century, both regulatory and social on share ownership left companies less able to count automatically on shareholder approval. A few friendly chats with familiar faces were now no longer enough to secure approval, and shareholders were instead required to be targeted en masse. Shareholdings became more and more dispersed and shareholder engagement therefore became more remote, despite their increased rights. Early shareholders were typically direct consumers and so were on a far closer basis with company management (1). Later shareholders often possessed wide-ranging portfolios rather than just merely being interested in one company, and so were generally more distant. Nevertheless, their votes were still required by the corporations they owned.
The twentieth century saw the separation of ownership and control at major companies. Now those in control needed the approval of the new class of owners – shareholders – increasingly empowered by the steady erosion of restrictions on shareholder voting throughout the twentieth century, and the idea of proportionate power in direct relation to a shareholder’s economic interest. The adoption of the ‘one share, one vote’ model (a listing requirement on the New York Stock Exchange from 1926-1986) put even more impetus on vote-chasing than before. Margaret Thatcher’s vision of the ‘Shareholder Democracy’ in the 1980’s resulted in the transfer of control of many UK utility companies from the State to individual and institutional shareholders; managers were now subject to the scrutiny of investors rather than ministers. Nevertheless, due to the relative inaction of the majority of small private shareholders, general public relations and campaigning alone cannot pick up the slack in chasing crucial shareholder votes, any more than a few select calls or meetings can do. The plethora of nominee accounts and the custodial chain now requires specialist services to unpick and bring to light the shareholder base.
The Rise and Rise of the Institutional Investor
The rise and rise of the institutional investor further necessitated the use of proxy solicitation. As the size and power of institutional investors has grown, so has their responsibility. Prior to 1974, US institutions had little interest in voting their holdings, until the introduction of the ERISA law required pension funds to exercise their voting rights in a responsible manner (2). This grew into a burgeoning culture of stewardship in the US, throughout the Anglo-Saxon domain, and increasingly world-wide, with the majority of the large institutions now providing disclosure on the exercise of their stewardship duties and voting rights, albeit to varying degrees. In the UK, this practice received an additional boost with the publication of the Stewardship Code in 2012, which laid out institutional shareholders’ duties and responsibilities towards their members on behalf of whom these institutions are expected to manage large pots of retirement funds and other monies for sustainable value creation over the long term.
It is estimated that 50% of the world’s stock is owned by institutional investors (3), ranging from more concentrated trade union and religiously-affiliated groups to giants such as Blackrock and Norges Bank (which has an average holding of 2% in European companies)(4). These institutions are more active in voting the shares they hold than individual shareholders, in line with their stewardship obligations (in the US, where voting is a legal requirement for institutional shareholders) and expectations (this is best practice in the UK, while not going as far as making it a legal requirement). To optimise the voting of large portfolios, institutional investors often possess teams solely dedicated to the exercise of voting rights as part of their stewardship duty. A few key members at each institution may therefore have their finger on the voting button. While a quick call with a senior contact at an institution does not provide sufficient assurance, identifying these contacts, and the ability to pre-empt their concerns, is essential; a necessary role best undertaken via proxy solicitation.
The Spectre of Shareholder Activism and Say-on-Pay
Shareholder activists, previously commonly regarded as unabashed corporate raiders or isolated malcontents, now possess a new-found respectability, with a general consensus that activist investors’ returns have been exceeding those of more standard indices (5). Proxy advisers – providers of research and voting recommendations – and their institutional shareholder clients will increasingly listen to cases of serious activists who present compelling rationales. With activism crossing the Atlantic into Europe, and especially the UK, proxy solicitation is becoming more and more involved in activist situations (6). Proxy solicitation has therefore now expanded from being a solely reactive force called in on a proxy fight with an activist, but as an on-going monitor. Proxy solicitors can identify activists appearing on the register, and being able to strength-test in advance the company’s current vulnerability in relation not just too financial or strategic matters, but also other factors such as corporate governance and remuneration which may prove to be ammunition for an activist. Much analysis of the share register is also required in order to identify and motivate the independent shareholders in a proxy fight.
Separately, the burgeoning adoption of say-on-pay has provided outlets for both institutional and individual shareholder disquiet on executive pay levels. Planned changes to remuneration have to be considered very carefully by companies, and much work may be required outside the AGM-season to avoid an embarrassing surprise at the following annual shareholder meeting. Proxy solicitors are therefore finding themselves involved in ever more consultative work on planned remuneration changes, and how best to formulate and present these changes at an early stage in engagement with key decision-makers at major shareholders.
These developments show the evolution from proxy solicitation as a rapid-response service called in for highlighted shareholder concerns and proxy fights, to an on-going consultative service for companies and activists alike, seeking to ensure the on-going support and continuing engagement of shareholders.