Lending securities doesn’t forfeit governance
09 April 2015 Washington DC
Image: Shutterstock
Securities lending does not stand in the way of institutional investors exercising their right to governance on company issues, according to a white paper by academics from Georgetown and DePaul Universities, and the University of Cambridge.
The paper, titled The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market, investigates the voting preferences of investors, specifically from a securities lending perspective.
While securities borrowers inherit proxy voting rights and could, in theory, vote in annual general meetings (AGMs) to affect corporate actions, lenders have the right to restrict lending in the run-up to such an event, and to recall securities at any given time.
This is more common practice among investors that have an incentive to monitor and exert governance, but also occurs among investors in firms that are performing poorly or have weak governance, and when returns for voting are likely to be higher, for example, if the vote relates to corporate control.
The paper found that higher share recall correlated with less support for the firm’s management, and more support for shareholder proposals. It noted that investors value their votes, often over the income from lending, but also that loan demand and borrowing fees increased around these record dates.
Generally, investors will keep their recall and proxy voting mechanisms private, however knowing these preferences can be important for firms trying to attract new investment. It can also be important information for policy-makers involved in the regulation of governance methods.
The report outlined five key findings; that investors will recall shares in order to exercise voting rights, that not all investors value their vote in the same way, that recall decisions vary depending on the firm in question and the characteristics of the vote, that lenders place a significantly higher value on votes than borrowers, and that share recall is associated with diminished support for management.
It concluded that proxy voting is an important channel for affecting corporate governance, and that investors should be sure to learn about proxy rights in good time before the record date for voting, in order to make an educated decision on whether to lend or not, and whether to recall shares.
The paper said: “Thus, our results are consistent with shareholder voting acting as an effective governance mechanism, but only when the economic stake is large enough or economic benefit great enough to overcome the free-rider problem that arises from the dispersed ownership.”
The report was completed by Reena Aggarwal of the McDonough School of Business at Georgetown University, Pedro Saffi of the Judge School of Business at the University of Cambridge, and Jason Sturgess of the Driehaus College of Business at DePaul University.
The paper, titled The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market, investigates the voting preferences of investors, specifically from a securities lending perspective.
While securities borrowers inherit proxy voting rights and could, in theory, vote in annual general meetings (AGMs) to affect corporate actions, lenders have the right to restrict lending in the run-up to such an event, and to recall securities at any given time.
This is more common practice among investors that have an incentive to monitor and exert governance, but also occurs among investors in firms that are performing poorly or have weak governance, and when returns for voting are likely to be higher, for example, if the vote relates to corporate control.
The paper found that higher share recall correlated with less support for the firm’s management, and more support for shareholder proposals. It noted that investors value their votes, often over the income from lending, but also that loan demand and borrowing fees increased around these record dates.
Generally, investors will keep their recall and proxy voting mechanisms private, however knowing these preferences can be important for firms trying to attract new investment. It can also be important information for policy-makers involved in the regulation of governance methods.
The report outlined five key findings; that investors will recall shares in order to exercise voting rights, that not all investors value their vote in the same way, that recall decisions vary depending on the firm in question and the characteristics of the vote, that lenders place a significantly higher value on votes than borrowers, and that share recall is associated with diminished support for management.
It concluded that proxy voting is an important channel for affecting corporate governance, and that investors should be sure to learn about proxy rights in good time before the record date for voting, in order to make an educated decision on whether to lend or not, and whether to recall shares.
The paper said: “Thus, our results are consistent with shareholder voting acting as an effective governance mechanism, but only when the economic stake is large enough or economic benefit great enough to overcome the free-rider problem that arises from the dispersed ownership.”
The report was completed by Reena Aggarwal of the McDonough School of Business at Georgetown University, Pedro Saffi of the Judge School of Business at the University of Cambridge, and Jason Sturgess of the Driehaus College of Business at DePaul University.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
