Report Calls for Action on Voting Impasse Between Asset Owners and Fund Managers

Barriers to split voting not “insurmountable”, says UK trustee body, but voting system no longer “fit for purpose”.

The UK fund management industry is routinely refusing to report or explain deviations from client voting policies in pooled funds, according to a new report by the Association of Member Nominated Trustees (AMNT).

Based on qualitative interviews across the industry, ‘Bringing Shareholder Voting into the 21st Century’ examines the barriers to effective stewardship by trustees and lists recommendations to overcome them.

“At a minimum, trustees need fund managers to report and explain when and why they have deviated from client voting policies i.e. where client policies set a benchmark for voting. However, the fund management industry has, in most cases, refused to do so in pooled fund arrangements,” the report said.

Recent regulatory measures in the UK have laid greater responsibility on trustees to incorporate ESG issues into their investment policies if they are deemed financially material, along with holding asset managers to account for their stewardship services, including voting.

Asset managers cite the holding of pooled funds in omnibus accounts by custodians and the complex nature of the voting systems among the cost and technical barriers faced. In pooled funds, there is often lack of clarity around who is the beneficial owner, which marked the splitting of votes, to reflect differing policies of pool participants, a manual and expensive process.

“To still be reliant on manual input is a concern and reflects the lack of investment in the voting infrastructure,” the AMNT report stated.

The barriers to split voting, however, are not “insurmountable”, with some fund managers already doing so for their clients. Asset owners’ instructions can be implemented, if the fund managers have the will to do so, according to the report.

It says the current voting system is no longer “fit for purpose” and calls for urgent reform. Simplifying the voting process and investing in modern technology to boost the voting infrastructure would enable effective stewardship of pension fund investments in the long run.

In the short term, the report recommends asset owners to develop policies on ESG issues that are financially material which they can benchmark against the fund managers’ own policies and hold them to account. If they don’t meet expectations, the report suggests changing to service providers which can better support them.

The AMNT also recommends the creation of an industry working group, supported by regulatory bodies, and led by the UK Department for Work and Pensions.

“There is now a clash between the asset owners and the fund managers over who should direct the voting policy of the investments. This is an untenable situation that requires immediate attention especially given the new, greater regulatory obligations placed upon trustees. Power needs to shift from fund managers to pension funds, and I am confident that the proposed working group can help to make this a reality,” said Janice Turner, founding co-chair, AMNT.

The association’s review on voting policies and practices of fund managers also showed that 42 fund managers had ambiguous voting policies and guidelines on climate change, gender and ethnic diversity in their publicly available policy statements. Of them, 20 fund managers failed to mention climate change in their voting policies.

In 2015, AMNT had developed the Red Line Voting Initiative to help pension schemes become active shareholders. However, most fund managers refused to accept Red Line Voting policies in pooled fund arrangements, which constituted nearly 50% of the assets under management in the UK at that time.

UK Pensions Minister Guy Opperman said he was disappointed that trustees still face challenges when seeking to exercise their rights to vote in line with their voting policies.

“In my view, this is not simply a frustration for trustees who face obstacles in complying with the spirit of the law. It is also a frustration for those of us who care about the role institutional investors play in society, investing ordinary people’s hard-earned savings in the real economy around us,” he wrote in a foreword to the report.

For the report, AMNT conducted 24 interviews of pension fund trustees, fund managers, ESG experts, proxy voting firms and custodians between May 2017 and February 2019.

The AMNT is a not-for-profit organisation representing member-nominated trustees, member-nominated directors and employee representatives of UK-based pension schemes in the private and public sector, both funded and unfunded.

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