Technology is touted as the answer to a vast array of the world’s problems, from improving health to protecting the environment. Corporate governance advocates view technology as a possible solution to a lack of retail investor participation in shareholder democracy.
As with many aspects of the capital markets, retail investors are particularly disadvantaged in having their voices heard as shareholders. While shareholder activism has been on the rise in the past couple of years, these efforts typically are led by hedge funds or other institutional investors; retail investors often have very little say. Similarly, in corporate governance issues, the large institutional investors have influence, while retail investors are ignored.
Yet, at a time when technology increasingly is empowering the individual in many other realms – developments such as social media and smartphones are giving individuals a greater public voice, and more power – corporate governance advocates are hoping that the same sort of impact materializes in the world of shareholder democracy.
At a conference in late October hosted by a Toronto-based investor advocacy group, the Canadian Foundation for Advancement of Investor Rights (FAIR Canada), the Canadian Coalition for Good Governance (CCGG) and the faculty of law at the University of Toronto, technology was touted as a possible solution to the disenfranchisement of retail investors.
Retail investors are viewed as too small and too dispersed to matter individually.
Traditionally, their only power has been to sell their shares if they don’t like the direction in which a company is going. Direct retail shareholding represents about half of equities holdings in Canadian public companies, so retail investors possibly would have some sway if they could act collectively. But there really is no mechanism for that happen.
Sharon Geraghty, partner with Torys LLP in Toronto, acknowledged at the conference that for corporate boards to engage with retail investors is a challenge. Given that retail investors are many and dispersed, communicating with them is expensive and less productive.
Regulators also traditionally focused on ensuring that retail investors can vote with their feet. Naizam Kanji, director of the Office of Mergers and Acquisitions at the Ontario Securities Commission (OSC), explains that regulators have viewed the ability to sell an investment as the primary option for retail investors, which regulators have supported by concentrating on ensuring fairness and transparency in the secondary market.
Yet, there may be technology-driven alternatives on the horizon that could empower retail investors to be more active participants in shareholder democracy. Jon Lukomnik, executive director for the Investor Responsibility Research Center and managing partner at Sinclair Capital LLC in New York, indicated at the FAIR Canada/CCGG conference that there are a couple of technological solutions in the works that could help empower individual retail investors – both by removing existing barriers to retail participation and by enabling greater active involvement.
One is the idea of “advance voting instructions,” which would allow an investor to choose to align his or her proxy votes with a particular organization that they believe best reflects their views on corporate governance issues. So, for example, an individual investor could order that his or her votes be cast in the same way as a particular portfolio manager’s vote. This option doesn’t yet exist but, Lukomnik says, “people are talking about creating it. It requires a lot of proxy plumbing, but that would be one way to encourage more [retail investor participation].”
Another innovation, which has just been proposed by the U.S. Securities and Exchange Commission (SEC), is the introduction of “universal ballot” in proxy contests. On Oct. 26, the SEC proposed a rule change that would require issuers to provide investors with ballots that list all of the available candidates in a proxy contest. This would allow inves- tors to choose who they want to vote for.
Shareholders in a company that’s involved in a proxy contest now typically receive a ballot that lists the candidates supported by management and a ballot of dissident candidates; shareholders have to vote for one slate or the other.
The universal ballot proposal aims to free up investors to choose whichever candidates they want to support, regardless of whether those candidates are being put forward by management or by an activist investor. The SEC’s proposal is out for a 60-day comment period.
In Canada, the CCGG has advocated for the introduction of universal proxy ballots. The group’s executive director, Stephen Erlichman, hopes the proposal is adopted in the U.S., and that the Canadian regulators are encouraged to look at introducing the policy here.
Another possible route to greater retail participation, Lukomnik suggests, is robo-advisors. He reports that two Silicon Valley-based startups are trying to build robo-advisors that are based on environmental, social and governance (ESG) principles. If that effort is successful, Lukomnik says, it will enhance retail investor participation in shareholder democracy.
These startups view focusing on ESG issues as a way to build a community of like-minded investors. “What they are talking about is having online polls on how people should vote [on shareholder issues], and being able to tweet how you are voting,” Lukomnik says.
While Lukomnik has no idea whether these startups will be successful, he says they’re interesting because they are aiming to build an empowered community of investors based on the stocks in which they have a stake, and not on whether to buy or sell particular companies, which now is the dominant role of social media among retail investors.
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