Industry Divided on ‘Pass-through Voting’ 

The ‘Big Three’ asset managers are offering services to clients to vote their own shares, but some experts say investors should be holding them to account on stewardship instead. 

A new paper on use of voting rights has revealed divergent views on the most effective ways for asset owners and managers to exercise oversight and control over investee companies.

Corporates – such as Apple, Tesla or Exxon – have grown in power to such an extent that they have the impact of a small government, making shareholder voting essential in challenging their influence, Georgia Stewart, CEO of voting fintech firm Tumelo, said.  

Tumelo recently urged the UK’s Financial Conduct Authority (FCA) to force asset managers to disclose to investors whether they permit them to vote on their shares, and has this month released a whitepaper exploring so-called pass-through voting.  

Pass-through voting allows investors in pooled funds to vote their shares in proportion to the assets under management they have invested, rather than allowing managers to vote on their clients’ behalf. 

The ‘Big Three’ asset managers BlackRock, Vanguard and State Street Global Advisors have all launched initiatives to pass some voting rights to clients. DWS was the first asset manager to offer this type of option in 2021.  

Some in the market see these moves reflecting the fact that influence is increasingly focused among the ‘Big Three’ fund managers, due to their large and growing ownership stakes. At a time when views on ESG are increasingly polarised, notably in the US, such concentration of ownership is one of a number of forces making discussions around shareholder rights increasingly controversial. 

Tumelo’s whitepaper said the Big Three cast about 23.5% of the votes at companies listed on the S&P 500 and that this is predicted to rise to 40.8% by the mid-2030s if current trends continue, making them the most powerful actors in the corporate governance world.  

“With the future of shareholder democracy at stake, careful consideration and conscientious implementation of pass-through voting is critical,” the report said.  

But some stewardship experts have said investment clients voting their shares may not always be in their best interests. 

Paul Lee, Head of Stewardship and Sustainable Investment Strategy at UK-based investment consultants Redington, who has had an extensive career in stewardship including roles at Hermes EOS, the Financial Reporting Council and the Pensions and Lifetimes Savings Association (PLSA), said there was a “lot of noise and excitement” around pass-through voting, but he “wasn’t sure it signifies very much at the moment”.   

“I think it’s distracting from the place where the real focus of attention should be which is holding mangers to account for doing their job.”  

Asset managers’ responsibility for stewardship 

Lee said while some asset owners had the resource and appetite to “take back control” they were few and far between. For the majority, the more effective option might be to ensure alignment between asset owner and manager perspectives, for example by embedding stewardship and engagement priorities more firmly into selection and monitoring processes.  

“The bulk of asset owners will always have to rely on the greater resourcing that’s in fund managers, and their job in the stewardship chain will be holding the managers to account and getting them to deliver more effectively,” he said. “That is a much more powerful conversation potentially than slightly tilting your voting activity to reflect marginal differences and perspectives on an issue.”  

Claudia Gray, Head of Financial Sector Research at ShareAction, said while the responsible investment charity advocated for pension savers and shareholders to have a greater say in how their money is being used, it would “keep a careful watch over how pass-through voting will be used in practice”.  

“It must not become a means for asset managers to absolve themselves of responsibility for good stewardship,” she said. “We are likely to see more asset managers offering this type of service over the coming months and it’s important that this process is used to meet the best interests of clients.” 

Sarah Wilson, CEO of London-based proxy voting firm Minerva Analytics, who also co-chaired a UK government-backed taskforce on pension scheme voting implementation, told ESG Investor that there was a spectrum of stewardship with some sophisticated pension funds having the resource to vote their shares, and others more suited to ‘expression of wish’ type relationships with their asset managers.   

So-called expression of wish products allows investors to submit a vote preference to their fund manager who will feed it into their considerations before submitting their vote at an AGM.  

Last October, Legal and General Investment Management (LGIM) launched an expression of wish digital service for its clients in partnership with Tumelo. The service lets pension scheme trustees in LGIM’s DC client base have a say on ESG issues and voting policies ahead of company votes.   

Stuart Murphy, Co-Head of Defined Contribution at LGIM, said it had traditionally engaged with clients on voting and stewardship through surveys and roundtables but its new digital service allowed it to scale this process and offer it more widely. 

In related news, Finbourne Technology has this week announced a new partnership with Tumelo which will see its voting technology integrated into Finbourne’s investment management data platform to help fund managers understand and reflect the voting interests of its clients. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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