ESMA wants views on 'empty voting'

Damned if you do. Damned if you don't. Voting the shares you own – or don't own – is fraught with issues. Let's look for a minute at the "old" way most companies in Europe ran their voting. If you hold the shares, you vote. It's straightforward, unambiguous, and it stinks. It was designed for old capital, before capital had markets. It was clear cut, but it assumed you rarely if ever traded shares. It suited the families who set up the companies and the financiers who provided early and long-term capital. But it made it difficult for any "modern" institutional investor to exercise voting rights, and thus entrenched the rights of certain shareholders at the cost of all the others. As capital markets developed, pressure on European Union practices led to the adoption of something like the US and UK practice of record dates. Holders of shares on a certain date – often about two weeks before the shareholders meeting – are entitled to vote. That way, active traders can draw a line under things and vote. As they buy one day, sell the next, then buy again, it didn't matter too much that some might be voting when they didn't actually own the shares and others who did might not be able to. A compromise, and not too messy. But then comes high frequency trading, stock lending, leverage short positions, and presto: you've got the problem often called "empty voting": large-scale investments where the economic interest runs counter to the shareholding.

The European Securities and Markets Authority wants to take another look at the issues and possible regulatory action to find ways to reduce some of the more perverse effects. "Discussion on empty voting is often connected to discussion on hidden ownership," it says. "Whereas empty voting relates to situations where shareholders have voting power without corresponding economic interest, hidden ownership relates to situations where investors have long economic exposure to a company without having corresponding voting power." Empty voting and hidden ownership are often each other's mirror image. It has issued a call for evidence, a consultation, that is, without a consultation paper, as a way of generating ideas about what, if anything, it might propose.

Source document: The ESMA call for evidence is an eight-page pdf file. Comments, please, by November 25.