Latin American Corporate Governance Roundtable

Voting Rights and the Right to Vote

Stephen H. Dover, CFA - March, 2001

Protecting the Residual Owners

Local Ownership, Meaningful Communication / Control

Dispersion Leads to Disenfranchisement

In Person (Community rights)

By Proxy (Investor rights)

A History of Shareholder Voting

Residual Owners Vs Management

Management controls the voting process

Management controls Board of Directors

Excessive Compensation; not linked to shareholder value

Entrenched Management

Agency Problem

Small shareholders incorrect presumption of protection

Is this really a need for shareholder participation?

The Wall Street Rule - Vote with your feet

If management is not trust worthy don’t buy the stock

Part I

Legal / Regulatory control is enough

Market Control: Self regulation

Non-voting shares offer participation in profits and liquidity

A minority vote is powerless anyway

Is this really a need for shareholder participation?

Institutional Investors have a Fiduciary Duty to vote

The threat of replacement improves management

Part II

Encourages investing instead of trading

The Wall Street Rule: Value left on the table

“Trust” is the oil of the market

Participation can incent better management

An active independent Board can change management

Non-voting shares

Residual ownership VS right of participation in profits

Looks like stock, but its not…

What is the value of a “meaningful” vote?

Dependent on benevolence of majority owners

Increases importance of regulation for protection

Basic “right” should be full participation in profits (tag along)

Key Problems and Policy Recommendations

Minority rights of non-voting shares should be vigorously upheld

Institutional investors should develop a voting policy

Voting policies (especially mutual funds) should be disclosed

Institutional shareholders need to take a more active role

Shareholders should exercise their right to vote as a fiduciary duty

Passive (index) funds should vote: no Wall Street Rule benefit

Key Problems and Policy Recommendations

Adequate time to vote

No open issues (“other business”) on the agenda

Include reasonable shareholder initiated proposals

Voting rules should be modified

Voting rules need to be simplified and standardized

Greater use of proxy voting services

Allow mail and internet voting