The California State Teachers’ Retirement System (CalSTRS) has written a letter to the Securities and Exchange Commision (SEC) in support for Lender-Directed Voting (LDV), an initiative that would see beneficial owners retaining their shareholder voting rights for stocks out on loan.
The largest teacher pension fund in the US joins the State Board of Administration of Florida (SBA) and a number of other lenders of securities in voicing their support of the proposal put forward by Ed Blount, executive director of the Center for the Study of Financial Market Evolution (CFSME).
Under the current voting rules pension funds cannot vote the proxies of shares that they have on loan despite remaining the long-term beneficial owners.
Within this system, beneficial owners such as CalSTRS recall all shares before important votes need to be made, therefore interrupting their lending income.
But according to CalSTRS, with LDV institutional investors would not have to choose between corporate governance responsibilities and the income from securities lending.
“As a large institutional investor with mostly indexed holdings share lending is a practical way to enhance returns for our beneficiaries. Additionally, CalSTRS is dedicated to pursuing good governance and actively votes its proxies and engages companies,” said Anne Sheehan, director of corporate governance, CalSTRS, in the letter to the SEC.
Blount of the CFSME says securities lending agents and broker-dealers would gain more stable loan and borrow portfolios, which in turn, would decrease investment, operational, and systemic risks.
“It’s a worthwhile thing to do. Not only does it give lenders the vote so they don’t have to recall their loans but it reduces operational risk in the securities lending markets because there are fewer recalls that take place for voting purposes. Recalls create a risk because there are spikes in activity around the recall and return dates and that creates excess volume that doesn’t really serve a purpose,” said Blount.
Issuers of shares would also benefit from increased voter participation as “unvoted” broker shares would be made available. For example, in 2010, 60 billion shares went unvoted, at this time 15 billion shares were out on loan as a result of securities lending. Therefore, as much as 25% of the 60 billion unvoted shares could have been included in the corporate governance process.
In a recent case study of Goldman Sachs alone, the CFSME found that 76% of sample brokers’ shares went unvoted. Had they been made available, issuers would have received an additional 121,000 votes.
At the moment, broker-dealers already have proxy arrangements with margin lenders, who have agreed as part of their margin account agreement, that their securities may be lent. And as broker dealers sometimes vote on behalf of lenders when recall fails, Blount says the operational capabilities are there and simply need to be expanded to all beneficial owners.
“We are saying this should not be done on a case by case basis,” says Blount.
However, while the capabilities are there, Blount is concerned that any changes as a result of Dodd Frank could eliminate this possibility.