Empty Voting

Lending shares is a big business.  Ask any large pension fund, and they will tell you that they lend shares because their funds benefit financially from the fees received.  Lending shares has real consequences when it is coupled with other factors in the changing corporate electoral system.  Under our system, when someone invests in a company by buying a share of stock, the investor can protect his or her (or its) interest by voting on a limited number of matters – most prominently the election of directors who will govern the company.  When the marriage of economic ownership and electoral franchise is broken, there are unintended consequences that should be fixed.  Let’s look at two examples of broken links between ownership and vote – the broker vote and loaned shares.

First, consider that majority voting is a trend that is increasing.  Under the system that most majority vote companies have adopted, if a director does not receive a majority of votes cast, he or she must, under company bylaws, tender his or her resignation.

Second, consider that because the NYSE has deemed director elections “non-routine,” brokers cannot vote stock held in street name for which they did not receive voting instructions from the beneficial owners.  Typically, those shares were voted for management and represented 10-15% of the vote.  By eliminating this “broker vote,” shares for which the brokers have not received voting instructions go unvoted.

Eliminating the broker vote makes sense.  Effectively the broker vote involved gratuitous votes – typically for management – that had no relationship to the real wishes of the beneficial shareholders.  In other words, they represented a separation of economic ownership from the vote of the real economic owners.

The same rationale should apply in the case of borrowed shares.  While there may be sound economic reasons for borrowing shares, permitting these shares to be voted by the borrowers divorces ownership from electoral franchise.  The borrowers of shares, just as the brokers who voted shares for which they did not have owner instructions, are voting without regard to the wishes or interests of the economic owners of the shares.

Corporate electoral reform requires a comprehensive look at election practices.  Just as the broker vote rightfully should not be voted by those who have no economic interest in the company, borrowed shares should not be voted for the same reason.  Let the share lenders recall and vote their shares, or let them go unvoted.

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