The mini annual general meeting season is quickly approaching, and as asset owners consider their proxy votes, it is worth revisiting a decade-old report evaluating the operational integrity of the proxy voting system.
In 2008, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) issued a report – Better company shareholder engagement and participation in Australia – which identified a number of key risks in the integrity of the proxy voting system, including the absence of an audit trail for lodged proxy votes, time constraints, the role of intermediaries/custodians, and paper-based manual processing.
Since then, a number of developments have occurred, including the creation of distributed ledger technology, which is now being applied to the proxy voting system.
SWIFT last year announced that several central securities depositories (CSDs) had signed a memorandum of understanding to work together and demonstrate how DLT could be implemented for corporate actions processing, including voting and proxy voting.
The seven CSDs included the Abu Dhabi Securities Exchange, Caja de Valores, Depósito Central de Valores, Nasdaq Market Technology AB, National Settlement Depository, SIX Securities Services and Strate Ltd. Of course, the ASX is working on its DLT trade settlement system upgrade to replace CHESS.
Meanwhile, US-based Broadridge Financial Solutions, Inc. and ICJ Inc., a joint venture of Broadridge and the Tokyo Stock Exchange, in February successfully conducted the first Proof of Concept (PoC) of blockchain-based proxy voting in Japan.
But although fintech solutions are being developed to continue the automation of proxy voting, in Australia, concerns remain that there are still weaknesses in the Australian proxy voting system that could
lead to major errors occurring.
Dean Paatsch, co-founder of Ownership Matters, a governance advisory service for institutional investors, notes that participants in the proxy voting chain have made improvements since the 2008 PJC report.
“The criticisms made in the PJC report still remain,” he said. “There is still no fully fledged audit trail, there is still reliance on manual processing and paper, and there are still holes in the system.”
There have been improvements.
Paatsch notes that most of the registries have moved to online vote submission, and most – but not all – of the custodians do submit on that basis.
“There has been far better communication between the registries and the custodians whenever there are vote discrepancies, so there have been operational fixes but the fundamental risks remain.”
He argues that the potential risks are particularly strong for corporate actions such as votes on schemes of arrangement.
“Let’s look at a change of control transaction, where there is a merger by scheme of arrangement,” he said.
“You have investors who don’t want that merger to go ahead, and who report that they submitted enough votes to block the merger, but the merger got up anyway. They could say they want an entire audit, but there’s no way of looking to the individual shares and they could make a case that their legal rights have been violated. That’s the nightmare scenario for the processor.”
A fintech solution like DLT won’t fix the problem, because while DLT could create a clear audit trail from the point of voting to the point of delivery to registries, unless the registries match votes to asset owners, it will be impossible to tell, Paatsch notes.
“The system is still not foolproof,” he said. “It’s one processing error from catastrophe, and as is the case with most things, we’ll need a crisis for it to be real, lasting collaborative reform.”