Voluntary corporate actions are often considered to be an inconsequential aspect of investment management. However, given the sheer amount of money that is lost to poorly handled corporate actions decisions – and the fiduciary infractions that they may spur
down the road – these activities are proving to be highly consequential.
Voluntary corporate actions are bound to individual stocks or bonds and require an election or decision to be made on behalf of shareholders. Asset managers and advisers are typically tasked with making the decision for investors. Yet, acting on a voluntary
corporate action often falls down the operational pecking order, handed over to the back office without enough due care from managers.
Here’s where the trouble begins. If no proactive decision is made on a voluntary corporate action, the outcome is often decided by a default option. To give an example – in the case of SCRIP dividend in the UK, the default option is to provide cash to the
shareholder, foregoing the option to take additional shares instead.
By not examining and deciding upon the optimal outcome, managers may be costing their clients money. As our analysis has revealed, over $1 billion of value is being discarded annually just on SCRIP dividends alone because of sub-optimal decision making.
Managers are missing the easy money, even when the option is clear as day. For example, with the National Grid dividend issue in May 2019, the stock election was significantly better than the cash option, being £0.4816 in the money. Even with the obvious
value, 55% of all shareholders took the cash option – compounded, the 24 bps left on the table for these investors added up to £39,000,000 of missed value.
When you consider how much more value is being missed across other types of voluntary corporate actions such as rights issues, buybacks and tenders, the amount lost to these activities is staggering.
So why are asset managers failing to capture this value? The reasons here are multifarious but time and complexity do play a part. Regulatory and jurisdictional restrictions can also influence the decision-making process; index trackers, for example,
may not be mandated to take anything other than cash to avoid weighting error.
Often, an asset manager may simply consider the alternate election is too small in terms of additional value to bother with. There are approximately 130 global SCRIP dividends every year, and if each portfolio manager misses $1,000 on each event then their
missed value may be considered too small to bother with at $130,000.
Yet, as we saw in the National Grid issue, these small amounts can add up quickly for asset managers – especially if every portfolio manager has exposure to the same event type. Per the hypothetical case outlined, if 100 portfolio managers in the same firm
make the same suboptimal elections, this adds up to $13,000,000 lost on one event type alone.
Taking the default option without diligence may save time – but given that it ultimately produces sub-optimal outcomes for investors, it’s arguable that failing to conduct diligence is a fundamental breach of fiduciary responsibility. Pension funds have
special cause to look at this carefully, given the growing concern among trustees as to whether their financial and non-financial actions could give rise to a breach of fiduciary responsibility. When this missed value is considered in the wider context of
pension fund deficits, solving for these inefficiencies is vital.
New regulations are raising the risk of fiduciary breach. MiFID II has ensured that managers now need to disclose how they elect on certain events which ensures a greater scrutiny from the underlying investors in future.
In August, the SEC published guidelines clarifying investment advisors’ responsibilities for proxy voting, citing that “Investment advisers owe each of their clients a duty of care and loyalty with respect to the services undertaken on the clients’ behalf
[….] the Advisers Act requires an investment adviser who exercises voting authority with respect to client securities to adopt and implement written policies and procedures that are reasonably designed to ensure that the investment adviser votes proxies in
the best interest of its clients.” The parallels with having a formal process for decisions on voluntary corporate actions (in addition to proxy voting) are clear. In addition, with class actions tied to securities at an all-time high and continuing to increase,
it is becoming more likely that action – from regulators or investors - may be taken on lost value from sub-optimal elections if fund managers fail to address this issue.
The solution? Managers must put in place processes that ensure efficient and optimal outcomes on these events - not only because of the potential legal consequences, but for the obligation they have to their underlying clients. The process of examining
and electing a voluntary corporate action can be mostly automated; appropriate internal controls are also attainable. A change in attitude is necessary, as a missed corporate action can no longer be seen as a minor nuisance.
Investors and pension fund trustees must also become more proactive in driving this value from their asset managers to ensure they are taking this seriously and not dismissing the lost value as perhaps too insignificant.
For managers, the technology to identify and maximize value is out there. Regardless of whether managers decide to buy or build, automated internal controls, safety nets and procedures will become an important element of ensuring that fiduciary duty is met
– and that the full value is attained from every investment.