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E-MailScott Hirst is Associate Professor of Law at Boston University and Adriana Z. Robertson is Donald N. Pritzker Professor of Business Law at the University of Chicago Law School. This post is based on their recent paper, forthcoming in the Yale Journal on Regulation.
Nothing in either corporate or securities law requires companies to notify investors what they will be voting on before the record date for the meeting. In a forthcoming paper, we show that, overwhelmingly, they do not. The result is “hidden agendas”: for 88% of shareholder votes, investors cannot find out what they will be voting on before the record date. This poses an especially serious problem for investors who engage in securities lending: they must decide whether the expected benefit of voting exceeds the expected benefit of continuing to lend their shares (or making them available for lending) without knowing what they will be voting on. All investors who engage in share lending are affected, but the problem is particularly acute for large investment managers that have fiduciary duties related to voting. At present, they must discharge these duties in the dark.
We propose a simple amendment to the Securities and Exchange Commission’s proxy rules that would solve the problem of hidden agendas: a requirement that public companies file proxy statements at least five days before the record date for the meeting. This simple change would give investors the information they need to make an informed decision about whether to retain the right to vote or not. If we believe that shareholder voting is important, and that investment managers and others should make informed decisions around voting, we should give them the information they need to do so.
Despite the centrality of shareholder voting to corporate governance, the rules and practices that hold them together can seem like a hodgepodge of corporate law rules, securities regulation, and market practices. The intersection of these rules and practices can lead to peculiar outcomes. Our paper focuses on one such outcome. While companies are free to publish a meeting’s agenda before its record date, there is no requirement that they do so. We find that, overwhelmingly, they do not. Our empirical analysis demonstrates that for 88% of shareholder votes, investors are unable to find out what questions they will be voting on in time to decide whether they wish to vote on them. We refer to these situations as “hidden agendas.” We note that our use of this term does not suggest that these companies have an ulterior motive for not disclosing their agenda prior to the record date; only that their agendas are not publicly available.
Hidden agendas are not a problem for “buy-and-hold” investors who hold their shares for the long term. These investors will be entitled to vote because they own their shares on the “record date,” typically about 55 days before the meeting. If these investors decide that voting isn’t worth the trouble, they can simply decline to do so when the time comes. But hidden agendas do impact investors that must transfer ownership of shares prior to the record date in order to vote. For the 88% of votes with hidden agendas, these investors must make their transfer decisions in the dark, without knowing what they will be voting on.
Much of the prior literature about ownership transfers for voting purposes has focused on investors that wish to acquire “empty votes” without an economic interest in the company. In our paper, we connect hidden agendas to a different group of investors: share lenders. This group includes some of the most important players in the corporate governance landscape. Share lenders range from the largest and most influential investment managers—with the greatest power to influence election outcomes—to the small retail investors that securities regulators take particular pains to protect. Share lending also plays an important role in the capital market. It both facilitates the settlement process and improves market pricing by enabling short selling. Share lenders are, by and large, long term investors in the underlying company; in contrast to empty voting, share lenders have a bona fide economic interest in the company. But despite this economic interest, they are not “owners” for the purposes of proxy voting. In order to vote, investors that have lent their shares must recall them before the record date.
Our data are consistent with prior evidence that share lenders value voting rights, including that of Christoffersen, Geczy, Musto & Reed (2007). Using securities lending data from 2014 to 2020, we find that the number of shares available to lend falls sharply a week or two before record dates before jumping back up the day after the record date. Because of hidden agendas, the overwhelming majority of these recall or withdrawal decisions, and the concomitant decisions not to recall or withdraw, are currently being made in the dark. This is likely to lead to costly errors regarding which shares worth recalling or withdrawing to vote, and which are not.
Hidden agendas are a particularly vexing problem for investment managers that advise mutual funds and retirement plans. These investment managers not only engage in a significant amount of securities lending on behalf of their advisees, but they also have legal duties regarding their proxy voting decisions. Current rules do not require these investment managers to vote every proxy, but they do require them to evaluate whether voting would be in the interest of their clients. Recent work has shown that share lenders are attentive to Securities and Exchange Commission (SEC) rules regarding voting (see Hu, Mitts, & Sylvester, 2020). Not having access to the agenda means that these investors must decide whether or not to vote without the information that is most important for that evaluation.
Hidden agendas are thus likely to lead to errors in recall or withdrawal decisions, resulting either in investment managers failing to vote on matters that might increase shareholder value, or unnecessarily reducing investor returns by foregoing lending revenue.
The effect of these errors is not that the potential votes attached to the lent (and not recalled) shares disappear, but that they are exercised by a different investor. Where shares are borrowed for the purposes of a short sale, the vote will reside with the person to whom the borrower sells the shares. As a result, hidden agendas will affect voting outcomes to the extent that this third-party buyer has different incentives, preferences, or information than the initial lender of the shares. It is possible that the buyer may be similar to the lender (indeed they might even be the same investor), and therefore have very similar incentives, preferences and information. But it is also possible that they might differ substantially in one or more of those respects, and therefore also in how they vote.
Fortunately, there is a straightforward solution to this problem: The SEC should require that proxy statements be filed at least five days before the record date for the meeting to which they relate. This solution is simple, easy to implement, and superior to alternatives that would operate though either state corporate law rules or private ordering. We suggest three approaches that companies could take to comply with our proposed rule, allowing them to choose the one that is and best suited to, and least costly in light of, their particular circumstances.
We aim to make three contributions in the paper. First, we explore the legal and institutional features of shareholder voting that give rise to the potential for hidden agendas. Second, we quantify the extent of hidden agendas and show that they are pervasive. And finally, we propose a simple solution that eliminates hidden agendas at relatively low cost to issuer firms. We urge the SEC to adopt this solution; the SEC’s stated view is that shareholder voting is important, and that investment managers and others should decide whether to vote. Its rules should give investors the information they need to do so.
The complete paper is available for download here.
