Pioneering pass-through voting technology is driving shareholder democracy while giving fund managers a competitive edge and a path to effective stewardship, a new white paper from Tumelo argues.
The paper from investor voting fintech Tumelo outlines the benefits pass-through voting is bringing to fund managers, asset owners, and retail investors (investment and broker platforms).
Pass-through voting is the mechanism by which investors in a pooled fund can vote the shares in proportion to the AUM they have invested – giving them a direct say in how the companies they invest in are run.
Until recently, voting on key issues at shareholder meetings was done exclusively by fund managers, as the registered owners of the shares. But technology now allows them to ‘pass-through’ votes to those clients who want more influence or flexibility over voting.
Tumelo’s white paper, with contributions from academics from the University of Arkansas School of Law and lawyers from Mishcon de Reya LLP, outlines the “underrated” role of fund managers: as stewards of companies.
The vote fund managers have in the boardroom is essential to direct the influence corporates have – and will have – on our society, it argues.
With the ‘Big Three’ fund managers – BlackRock, State Street and Vanguard – wielding huge influence on corporate decisions, Tumelo asks: what does effective stewardship look like today? And how could flexible voting solutions facilitate better alignment between asset owners and fund managers?
Shareholder democracy and the direction or travel
The white paper argues there is growing pressure on fund managers in both the UK and US to pass through votes to investors.
While the US is pursuing a ‘top down’ approach, such as via the proposed INDEX Act, pressure in the UK is instead ‘bottom up’, with asset owners insisting fund managers support them in fulfilling their stewardship duties.
Support for pass-through voting is growing across a myriad of regulations, task forces, and recommendations, Tumelo says, pointing to action from the FCA and PLSA.
Meanwhile, recent developments from ‘Big Three’ managers BlackRock, Vanguard and State Street show that fund managers are acting on growing pressure from investors and regulators.
The power of pass-through voting
The benefits of adopting pass-through voting are widespread, the white paper argues.
For example, fund managers can pass the decision to vote on contentious issues to clients, potentially lowering the chances of divestment from funds.
It also means they can offer products that combine the voting flexibility of a segregated mandate with the low-cost operational efficiency of pooled funds.
For retail investors, pass-through voting technology empowers them to submit votes in the companies they invest in, putting “all their money to work in line with their economic, social, or environmental outlook”. This could lead to greater investor engagement and better financial literacy.
The problem with gaps in voting alignment
A key finding from the paper is the frequent and significant gaps in voting alignment between pension plans, proxy recommendations and fund managers.
Typically, the manager of a pooled fund will only cast one vote on a particular resolution yet may have several clients invested with them which would have voted differently. This results in gaps in voting alignment. By recognising where the gaps are and working together to close them, clients – and especially trustees – can rest assured they are doing the right thing for their members.
Even for larger schemes using segregated mandates alongside pooled funds, a similar problem exists. As each part – the segregated part and the pooled funds part – may use different vote policies, any crossover in holdings could see one scheme voting in opposite directions on a single resolution.
So, what’s next?
With a growing number of regulatory initiatives focusing on stewardship – such as the FCA’s SDR consultation, the 2023 review of the FRC Stewardship code, the FCA-led Vote Reporting Group, the Treasury-led taskforce on digitising shareholdings and the DWP’s work on occupational scheme stewardship – Tumelo believes it is only a matter of time before the provision of pass-through voting shifts from a ‘nice to have’ to being an essential service all asset owners are seeking from their fund managers.
Georgia Stewart, CEO and co-founder at Tumelo, said:
“Corporates have grown in power and globalised to such an extent that some – Apple, Tesla, Exxon, for example – have the impact of small governments. And if they aren’t yet as big as governments, they certainly influence them. Therefore, the voice – the vote – fund managers have in the boardroom is essential to challenge and to decide the impact companies have on our society.
“Today, influence is increasingly concentrated among the ‘Big Three’ fund managers; views on ESG issues are increasingly polarised; and shareholder votes are increasingly controversial. As a result, there is growing demand from fund managers’ clients, as well as from consultants and regulators, to ensure the client view is reflected in fund managers’ voting decisions.
“The shareholder’s vote is a vital tool – carrot or stick – in the democratic corporate governance system. So, many stakeholders are already asking, is today’s system the best it can be? And how can technology better support fund managers to better understand clients, meet their evolving needs, and align on stewardship outcomes?”