The New Vote Borrowing

When activist hedge fund managers launch proxy contests to replace corporate directors and pressure for changes, everyone focuses on who has the votes. But according to RiskMetrics Group Inc.'s director Patrick McGurn and Jeffrey Mahoney, general counsel, Council of Institutional Investors in Washington, a greater focus needs to be placed on the subject of pension fund lending shares -- and the votes that go along with those stakes -- out for a fee.
McGurn on Friday told corporate attorneys at the annual American Law Institute-American Bar Association conference on corporate governance that, in addition to concerns that activist hedge fund managers are abusing the system by borrowing shares to effect change (a subject University of Texas Law School Professor Henry Hu has examined), corporations have to begin to concern themselves with borrowed shares that "no one" is voting. When institutions lend the shares out, they basically give away the title to those shares for a period of time. If they don't hold the title over the record date, the institutions are basically giving up their voting rights.
"Many of you corporate executives are look at your list of 20 largest investors think you can guarantee that half of those funds will vote to support your slate," McGurn said. "But at least half of those funds have a substantial amount of those shares out on loan at the record date, and they may not have the right to vote at the meeting. The bigger problem is quite often no one is voting those share positions at meetings."
Mahoney on Friday told corporate attorneys at the conference that the CII was working on a policy to address this issue.
"It [share lending] is something that a number of institutional investors do for an additional fee," Mahoney said. "Then the issue is where are these shares, how do I get them back, so I can vote them under certain circumstances. We don't have a policy about this issue right now, but it is something we are actively looking into. It is a hot issue because some of our members wouldn't be able to tell me where those shares are. That is of significant concern. Hopefully we will have a policy about this that we can add to our best practices in the near future." - Ron Orol