The London borough of Hounslow wants a greater say in your governance. In March, the west London pension fund became the first client of proxy adviser Pensions & Investment Research Consultants (PIRC) to sign up to Voting Choice from BlackRock, applying its own voting policy to investments in a pooled, global index fund. In doing so, Hounslow has put its money in with a growing cohort of asset owners around the world that want a bigger say in proxy season.
Voting Choice from BlackRock went live at the start of 2022. Nine months later, $1.8 tn of index equity assets under management were eligible for the scheme and, as of September 30, 2022, $452 bn in assets were exercising that option. By March 15, 2023, when BlackRock CEO Larry Fink published his annual letter to companies, that figure had hit $500 bn. In February, Vanguard launched a similar pilot scheme that will run until the end of June.
Greater voting power for asset owners is something PIRC in particular has long campaigned for. ‘Our clients have different views on a range of different issues,’ says Tom Powdrill, head of stewardship at the proxy adviser. ‘You simply can’t have a single proxy voting policy that can represent all those views.’
Support for ESG
Today, the spotlight on ESG issues means a bigger conversation is taking place around governance, climate and corporate social policies and there is a greater expectation that funds will make their voices heard.
‘More of the underlying clients of asset managers have started to articulate their own views,’ continues Powdrill. This in turn has put pressure on asset owners, driving demand for a greater role in proxy voting. ‘The influence of asset owners over the exercise of proxy votes is going to increase,’ he states.
What about the way asset owners are likely to vote? Each proxy season throws up new figures on the growing number of ESG proposals being put forward by investors – should IROs see Voting Choice adoption as being linked to greater ESG support?
‘[It’s easy to assume] that ESG-focused investors will be more interested in using Voting Choice but I’m not sure that’s necessarily how it’s playing out in the first instance,’ says Georgia Stewart, CEO of investor stewardship fintech Tumelo.
‘We meet many asset owners that want to vote on individual issues, rather than being policy-led, because they feel misaligned on one topic – executive renumeration at US issuers, for example.
‘Asset owners in the UK are particularly progressive on climate change, more progressive than the average US-based fund manager might be, so they’re asking for influence – overrides – on those individual votes, in proportion to the assets they hold in the pooled fund.’
On the flip side, Stewart notes that in the US in particular, ‘there is significant demand from asset owners that would prefer their fund manager to have a ‘standard’ voting policy, rather than a ‘sustainability’ policy in place. Therefore, asset managers that previously voted as a house and always with a sustainability policy could with a sustainability policy could choose to offer multiple policies.’
The power of proxy advisers
If a fund wants to vote fully in line with its own views, it needs to develop governance policies in the first place, of course. Because of this, not all funds choosing Voting Choice use or even have internal policies, something BlackRock recognizes and accommodates through four Voting Choice options.
‘The money we manage is not our own; it belongs to our clients – and our role as an asset manager is to help our clients achieve their long-term financial goals,’ says Jessica Burt, head of voting platform for BlackRock's investment stewardship team. ‘The evolution of investing has led to greater choice of investing strategies – allowing investors to express differences in their investment horizons, risk preferences and financial goals.
‘We see a growing interest among clients in the corporate governance of public companies. Therefore, as we worked to launch, we consulted with our clients. The options have been informed by those client discussions. This broad menu gives eligible clients the opportunity to direct proxy voting consistent with their own preferences, within the framework that now exists. That said, many clients do – and will – continue to ask and rely on BlackRock’s investment stewardship team, as a fiduciary, to continue to engage and execute voting on their behalf.’
Of the $1.8 tn of eligible client assets as of September 30, 2022, BlackRock tells IR Magazine that 75 percent of clients have stuck with BlackRock for voting and engagement. Of the $500 bn (as of March 15, 2023) that have chosen to participate in Voting Choice, 60 percent are doing so with a ‘client-owned’ policy, 28 percent are using ‘third-party’ policies and 12 percent a hybrid option.
That 28 percent is far from an insignificant figure. Could it result in a further concentration of power at big proxy advisers? Fink has already highlighted this as a risk.
‘As more asset owners choose to direct their own votes, they need to make sure they are investing the time and resources to make informed decisions on critical governance issues,’ he wrote in his 2023 letter to CEOs. ‘Proxy advisers can play an important role. But if asset owners rely too much on a few proxy advisers, their voice may fall short of its potential. I certainly believe the industry would benefit from more proxy advisers that can add diversity of views on shareholder issues.
‘Amid these shifts, companies will also need to find new ways to reach shareholders [that] choose to direct their own votes, and robust disclosures and advances in the proxy ecosystem will become even more important.’
Activists need adviser support
As far back as 2015, Norges Bank Investment Management, the world’s largest sovereign wealth fund, was calling for regulation to check the power of big proxy advisers. Last year, FTI Consulting published research that shows how the big two – ISS and Glass Lewis – can make or break an activist campaign at a vote.
FTI examined proxy contests in which the underlying campaign sought board seats at US companies with market capitalizations of at least $100 mn and where ISS and Glass Lewis published voting recommendations. From 2017 through 2021, each year saw between 12 and 15 such proxy contests; the first half of 2022 had 14.
Kurt Moeller, FTI managing director, wrote a think piece titled Activists’ lack of recent success: Causes and implications, in which he notes that ISS and Glass Lewis have been ‘much less likely’ to recommend that shareholders vote for an activist slate – a shift on recent years that he says is largely due to ‘broad macro factors’.
Putting the power of ISS and Glass Lewis into perspective, Moeller writes: ‘An activist almost always needs [the support of] both ISS and Glass Lewis to win a contest. Over the entire period, in only two of 80 situations did an activist obtain a board seat while winning the endorsement of just one proxy adviser, and no activist won a board seat without at least one endorsement. When an activist received support from both ISS and Glass Lewis, [however], it almost always won at least one seat.’
There are various avenues available for corporates to engage with and fact-check information used by proxy advisers, but what about the investor side? Gianluca Ferrari, founding partner of sustainability-focused activist Clearway Capital, talks about proxy adviser engagement as part of the preparation process of some activist campaigns.
‘We had very intense conversations with the proxy advisers around our campaign at TotalEnergies, for example, because their position relating to companies’ response to the situation in Ukraine was uncertain,’ he explains. ‘We tried to develop a dialogue to understand how they viewed this issue and we shaped our campaign accordingly.’
Ferrari adds, however, that proxy adviser support isn’t a consideration when choosing a target. ‘Any campaign is the culmination of months and months of due diligence and engagement behind the scenes,' he says. ‘If we’re trying to get a company to improve its impact on society, we’re not thinking about how ISS or Glass Lewis is going to view it if we end up in a vote. Those considerations come at the very end of an escalation period, but the majority of our investments never make the news.’
Universal proxy settlements
Indeed, even though many expected something of an avalanche fallout from universal proxy, Bruce Goldfarb, president and CEO of Okapi Partners, says the real impact is not yet clear.
‘To date, the biggest impact has been a fear of the unknown, which has led to fewer campaigns that have gone to a vote than in previous years. The campaigns that would have been the first cases under the new universal proxy card requirements in 2022 largely settled,’ he told IR Magazine in March. ‘The basis on which campaigns are run doesn’t appear to have changed yet. Nevertheless, we are talking with yet. Nevertheless, we are talking with investors that are considering campaigns they wouldn’t have contemplated without the universal proxy card. That said, none of those have yet come to fruition.’
Moeller adds that this trend for settlement has been growing in recent years. ‘In general, companies have become smarter in the past few years and have been more willing to settle,’ he points out. ‘There used to be, among some advisers, a mentality of ‘fight – and don’t concede’. But a lot of times it’s better – if you think there is a decent chance of losing – to not waste the time, money and energy involved in fighting with an investor.’
New rules of engagement
So what does all of this mean for IROs? Powdrill suggests that ‘in terms of engagement, IR professionals are going to have to go further down their share register’.
Stewart agrees: ‘Investor relations teams [will potentially have] a larger number of stakeholders to communicate with,’ she says. ‘Rather than BlackRock being the top owner and top voter, this could translate to a world where BlackRock is the top owner, but not the top voter. That may change how IR teams prioritize their time and the channels they use to communicate with those that do have voting power.’
She points to a potential disconnect between what companies hear when engaging and their voting outcomes. ‘I expect some institutional investors will take on some level of engagement responsibility with their priority securities,’ she says.
‘But you could also end up with a situation where the manager continues to engage, while the client votes. That could create instances – at least in the early days – where what the fund manager is saying in meetings does not line up with its voting record, because its clients are coming in at the last minute with some level of control over their votes.’
All this might be some way down the line, but both Powdrill and Stewart expect increasing numbers of fund managers to follow BlackRock in expanding voting options. Even Fink acknowledges the potentially huge impact of Voting Choice combined with other proxy season shifts, stating that ‘how the voting ecosystem changes over the next decade could be a transformative force that reshapes corporate governance.’
ISS and Glass Lewis both declined to comment for this article.