The UK’s Financial Services Secretary Paul Myners’ proposals to establish a two tier shareholder register could add another layer of data complexity for financial institutions operating in the market. The proposals are aimed at ensuring longstanding institutional investors receive greater voting clout than short term investors and preventing the increase in what Myners calls “ownerless corporations”.
Myners this week elaborated on the rationale behind differential voting rights thusly: “We need to look at ways in which we can offer a carrot to some financial institutions to take the issue of ownership more seriously. In many cases hedge funds might only be shareholders for a few weeks. Should they be treated in the same way as a long term shareholder or should we be doing more to reward and engage the long term shareholder?”
The impact of introducing a two tier system, similar to that of France or Sweden, would be to fundamentally alter the current ‘one share, one vote’ principle for shareholders in the UK. This in turn, would significantly impact the way that corporate actions data is weighted and processed, as if any more complexity was needed in this particularly tricky area of the market!
As well as recording when shareholders vote, third party data providers and custodians would be required to weight these votes subject to the different classes of investor. Myners has not yet elaborated on what a long term investor would look like – how long is long term? Industry standard classifications would therefore need to be defined first for these categories, before any of this work could begin.
Obviously data providers and vendors active in markets with multi-tiered voting rights would be at an advantage over those focused solely on markets such as the UK. But it would likely pose a data challenge for custodians’ internal data departments: to add another data attribute to monitor on top of those that already need to be captured in the corporate actions process.
However, the proposals may not get very far, as they have provoked a significant backlash from the institutional investment market, which is wary of a two tier system. David Paterson, head of corporate governance at the National Association of Pension Funds (NAPF), says: “It fails to take into account the need for managers to buy or sell shares based on external factors. What is needed is better dialogue between companies and shareholders.”
The Investment Management Association is also up in arms about the idea and contends that the government should not be in a position to mandate the best way for firms to manage money. Multi-tiered voting rights would potentially expose firms to be subject to the whim of a small group of investors, the industry group argues.