Could US voting reforms work for UK retail investors?

The issue of wasted votes is an issue on both sides of the Atlantic. In the United States, regulators have recently tested one approach to the problem. And in the UK, exceptional levels of corporate activity have meant a series of high-profile shareholder votes to decide questions that can have a lasting effect on people’s investments.

All this has highlighted the same underlying challenge: how do we ensure that individual investors can meaningfully exercise the rights that come with ownership? A recent development in the United States is therefore worth watching.

The US Securities and Exchange Commission has issued no-action relief allowing registered funds and business development companies to implement programmes through which retail shareholders can give standing voting instructions. That means an investor could choose in advance to have their shares voted at future meetings in line with the fund board’s recommendations, although they are able to change their mind.

The attraction of that is clear. Rather than receiving voting materials repeatedly and taking no action, an investor can establish an instruction that prevents their votes from routinely going to waste.

This is not an entirely new concept in the US. A version of the approach had previously received relief for operating companies. The latest decision extends the framework to registered funds and business development companies, with different conditions and carve-outs reflecting the particular considerations that apply to funds.

The importance of challenge and scrutiny

We shouldn’t rush to assume that the US model can or should just be copied. However, the challenge itself is certainly not unique to America, nor is it unique to investment trusts, either. 

Recent events elsewhere in the UK market have demonstrated how difficult it can be to secure meaningful participation and engagement, even when the outcome of a vote matters to a companies’ continued existence as a listed company. Gamma Communications recently attracted attention – and our surprise – when it extended the deadline for a shareholder vote after insufficient votes had been received by the original timetable.  

The specifics of any individual situation will differ, and companies, boards and shareholders may reasonably take different views on the issues being voted on. But the episode underlined a broader reality: too many votes are still failing to find their way into the process – and it isn’t necessarily just retail investors who might benefit from the spirit of an ownership culture.

The central challenge is bigger than how uncast votes are treated. It is how we encourage more investors to understand and exercise the rights attached to their shares and develop an ownership culture.

Standing instructions could help prevent votes from disappearing, but automatically following a board’s recommendation is not the same as active shareholder engagement.

A healthy market needs scrutiny, challenge and an appropriate balance between different shareholder interests. So it feels intuitive, perhaps, that any solution should therefore focus on increasing participation rather than predetermining outcomes.  

Standing instructions could form part of the debate, provided investors expressly opt in, retain meaningful control and can change their minds. However, it’s important to remember that the experience of recent years also shows that engagement can rise when investors recognise that the stakes are high. The challenge is to make participation easier before every vote becomes a crisis.

The US has advanced one possible answer. The UK may well examine it, but through the lens of our own market and with the right safeguards.

While I certainly don’t have all the answers, I do know that shareholder democracy is strongest not when a choice is made on an investor’s behalf, but when investors are given every reasonable opportunity to make that choice themselves, without friction.

We will keep watching the US market versus the UK with interest.

Christian Pittard is head of closed-end funds and managing director of corporate finance at Aberdeen Investments.