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The Power of the Pass-Through: Democratic Empowerment or Accountability Shift?
Voting is a crucial part of being a responsible investor, giving investors the power to influence the strategic direction of the companies they invest in. Given the significant social and environmental impacts of board decision-making, it’s considered essential for shareholders to actively participate in the voting process to determine how a company is governed to make strategic decisions.
The rise of passive investing has initiated a significant debate, particularly around the voting behaviour of large institutional investors. This scrutiny has intensified following the “ESG backlash” in the US, where some Republican-led states have withdrawn funds from BlackRock, naming concerns over its support for Environmental, Social, and Governance (“ESG “) proposals and accusing it of being "too woke". This backlash underscores the challenges asset managers face in trying to navigate the “ESG” debate in a polarized environment while trying to retain clients.
In response to the growing scrutiny over how large institutional investors vote - which gained momentum after the "ESG backlash" in the US – the idea of pass-through voting has gained traction as a key solution. More popularly known as “Voting Choice”, as termed by BlackRock, pass-through voting gives investors control over how their shares are voted, increasingly shifting away responsibility from the investors’ stewardship teams.
In 2022, BlackRock launched its “Voting Choice” program to empower its clients with more control over voting decisions. BlackRock’s clients can select from some of the below options:
• Client Control - Investors cast their votes directly on resolutions.
• Hybrid Approach to Voting – Investors pick and choose companies/ resolutions they wish to make voting decisions on, leaving BlackRock to manage the rest.
• Third-Party Policy Selection - Investors choose a third-party to vote on their behalf based on a preferred policy (ISS, Glass Lewis or Egan-Jones).
• Relying on BlackRock’s Stewardship Team - Clients opt for BlackRock to continue voting as usual, leveraging the firm’s stewardship expertise.
By 2023, over 25% of eligible assets were participating in this initiative, reflecting some interest in clients wanting to take more control.
For more details, consult BlackRock Press Release and Voting Choice White Paper.
In 2022, LGIM was the first UK-based asset manager to launch an “Expression of Wish” pilot service, working with fintech Tumelo to allow clients to express their views on upcoming AGM votes directly to the LGIM stewardship team and streamline the dialogue between the two. This program has gained traction and now offers clients to have a direct say in the voting process (Tumelo / LGIM Case Study). Using Tumelo’s voting technology, clients of LGIM can now choose to:
• Vote with LGIM’s Stewardship Team.
• Vote with a Third-Party template policy or custom policy.
• Vote on everything / Override votes on key issues.
For more details, consult LGIM’s 2023 Active Ownership Report.
Since its launch in early 2023, the Vanguard Voting Choice Pilot Program has expanded to include five equity index funds comprising more than $100 billion in assets. Vanguard's Clients currently have the option to choose from the following voting options for their portfolios:
• Vanguard-Advised Funds Policy – Votes are cast based on decisions of Vanguard's Stewardship Team, using the funds' proxy voting policy.
• Company Board-Aligned Policy – Votes are cast based on the portfolio company's recommendations (management friendly).
• Third-Party ESG Policy – Votes are cast based on Glass Lewis' ESG Policy.
• “Not Voting” Policy – Clients opt not to cast their vote.
During the 2024 proxy season, approximately 40,000 of the 2 million eligible Vanguard investors participated in the pilot program (2%), almost half of whom opted for Vanguard-Advised Funds Policy.
Looking ahead, Vanguard plans to navigate a follow-up program in 2025 to tackle some of the technical and communication challenges that have arisen.
For more details, consult Vanguard’s Press Release.
In 2023, SSgA introduced its Proxy Voting Choice Program, which quickly expanded to cover over 80% of the eligible index equity assets it manages. This includes all US institutional index equity funds, representing $1.9 trillion in assets under management (AUM). SSgA offers clients two options for voting at general meetings:
• Clients Choose Third-Party Policies - Investors select a third-party voting policy to represent their interests (ISS Benchmark or Thematic Policies).
• Clients Rely on SSgA’s Stewardship Team - SSgA’s Stewardship Team manages voting on behalf of the client.
For more details, consult SSgA’s Proxy Voting Choice.
In 2024, Northern Trust Asset Management, strengthened its stewardship capabilities by appointing Paul Clark as Global Head of Stewardship and launching a proxy voting choice solution for investors in select common and collective funds. Eligible investors will be able to choose from four voting guideline options, including the option to leverage proxy voting guidelines developed by Northern Trust’s Proxy Voting Committee.
Three-quarters of NTAM's equity assets clients now have the option for customised proxy voting, highlighting the firm’s dedication to giving investors greater control and involvement in key decisions.
For more details, consult NTAM’s Press Release.
The reactions to pass-through voting have been varied.
• Positive Feedback
Many see voting choice as a significant step towards reducing the concentration of voting power held by a few large institutional investors, where ‘The Big Three—BlackRock, Vanguard, and State Street—collectively cast nearly 25% of the votes at S&P 500 companies.’ It’s viewed as a step toward a more democratic environment, where individual shareholder is given more of a voice.
• Negative Feedback
The main concern about pass-through voting is that investors might not fully grasp the issues or the impact of their votes. Some critics also argue that this fragmentation of voting power could weaken the ability of institutional investors to push for meaningful changes, while companies may not fully understand what each vote means and whom they should engage with.
Despite initial enthusiasm, actual results from Voting Choice appear to be limited. For example, despite Vanguard ESG U.S. Stock ETF predominantly opting for the ESG-aligned policy, this did not translate into action. In August, “Vanguard said it did not back any of 400 shareholder proposals on environmental and social matters” during the most recent proxy season (Source: Reuters).
Furthermore, Morningstar’s Director of Investment Stewardship Research stated that he “can’t tell whether [voting choice] made much of a difference” (Source: New York Times).
