Learning from the European Shareholder Rights Directive
Proxy voting is an important part of the investment process, yet the current experience for retail investors is cumbersome and outdated. With improvements to the proxy voting process, we can empower retail investors and improve overall confidence in the markets. Learn more about how we can make proxy voting more efficient and user-friendly in this blog post.
The European Shareholder Rights Directive II (the Directive) came into effect in September 2020, having been introduced in 2017. In just three short years, the EU sought to transform an unwieldy, difficult system to ensure issuers and shareholders have transparency and more time to research issues, as well as greater accountability. The Shareholder Rights Directive applies to issuers and intermediaries across the EU, as well as non-EU investors into EU issuers, which means that the Shareholder Rights Directive has global implications.
No wonder that a company like Proxymity sprang out of Citigroup’s institutional asset servicing business and gained further support from BNY Mellon, Clearstream, Deutsche Bank, JP Morgan and State Street. The only way to achieve the Shareholder Rights Directive’s goals in such a short time was to facilitate the creation of what is effectively an industry utility using standardized and integrated technology solutions. If the EU can do it in three years, so can the US.
In a blog post on Principal-Agent conflicts of interest, I supported a proposal put forward by Caleb Griffiths regarding empowering individual index fund investors to influence the proxy voting process as a means for resolving this conflict. Now it seems that Senators Toomey and Johnson agree. Senator Baldwin and Congresswoman Jayapol seem to agree. The SEC also appears committed to reforms; however, without substantial commitment to upgrade the proxy plumbing and controls, the US proxy system will continue to subordinate retail investors’ interests and perpetuate the principal-agency conflict. Fortunately, the EU has provided a potential roadmap for navigating to a better overall system. They have also jump started the required global technology upgrades needed to underpin real change.
Shareholder Rights and US Proxy Voting
To improve the US proxy process requires a significant commitment to change: legal, regulatory and technological. As outlined in a post to Harvard Law School’s Governance forum entitled Proxy Plumbing Recommendations , Anne Sheehan and John C. Coates laid out four changes that would bring the US into greater alignment with the EU.
- Require end-to-end vote confirmations to end-users of the proxy system;
- Require all involved in the system to cooperate in reconciling vote-related information, on a regular schedule, including outside specific votes, to provide a basis for continuously uncovering and remediating flaws in the basic “plumbing” of the system;
- Conduct studies on (a) investor views on anonymity and (b) share lending; and
- Adopt a “universal proxy” rule.
Given the technology investments and industry commitments already made to support the Shareholder Rights Directive, as well as existing technologies and connectivity, enhancements to proxy plumbing and controls should be easier. Laying a technology foundation for straight-through proxy processing should enable passing proxies through to stakeholders. Politicians on both sides agree that the true shareholders should be empowered to vote. However, like politicians the world over, they cannot agree to the best approach and what needs to be solved, when and how.
We believe that the proposals above, if implemented, would go a long way in restoring trust and confidence in our proxy voting system. They would also represent meaningful steps forward in terms of safeguarding shareholder rights and improving transparency. We urge all those with a stake in our proxy voting system – issuers, investors, intermediaries and others – to come together to support these measures.
