SEC Voting Rule Change Good For Creditors and Shareholders
A proposed rule change by the Securities and Exchange Commission to give shareholders much greater power to influence corporate director elections should also benefit creditors, according to Moody’s. That is, unless activist hedge funds hijack the new rights in pursuit of short term gains.
“In play is the so-called “broker vote” rule that allows brokers to vote uninstructed client shares in uncontested (i.e. “routine”) director elections. The issue of broker votes is technical, but significant, since an estimated 70-80% of U.S. public company shares are held in “street name” and managed by brokers. Under current rules, if brokers do not receive voting instructions at least 10 days before the election, they may vote how they wish – usually “for” management’s slate of nominees.
Since many individual shareholders don’t vote, it dilutes the impact of those who do, namely institutional investors and “activist” investors such as hedge funds. Ending the rule (by stipulating that director elections are no longer routine items and brokers cannot vote without receiving client instructions) would therefore give shareholders much more leverage in director elections, including greater ability to remove or signal discontent with underperforming directors.”
We see these moves as largely positive from a creditor perspective, potentially enhancing board accountability and investor awareness. However, short-term investors, namely “activist” hedge funds, could hijack these and other proposed new rights, using them to press companies harder for short-term gains at the cost of long-term credit quality.
“Generally speaking, these new rights, if promulgated, could help improve director and management accountability and awareness if they are used prudently and thoughtfully by long-term shareholders, whose interests are generally aligned with bondholders in terms of long-term value creation. Short-term investors, however, could exercise their new rights to press companies harder for short-term gains, including the adoption of more aggressive financial policy, at the cost of long-term credit quality.”
Moody’s comments are included in its latest Weekly Credit Outlook.
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