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