Ballot box power is devolving to retail investors

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As Wall Street frets over the looming US presidential election, the giant asset managers are also looking at other ballot box issues: those of their investors.

Bludgeoned for the past two years by US Republicans alleging political wokeism, BlackRock, State Street and Vanguard are now gradually offering investors the chance to vote at companies’ annual shareholder meetings. This marks a significant shift as investors historically have relied on asset managers to vote for them on issues such as board directors, executive pay and various shareholder petitions.

BlackRock chief executive Larry Fink says the change will strengthen “shareholder democracy”. The firm now offers pass-through voting in more than 650 global funds totalling $2.6tn in equity assets. On October 15, State Street is starting a pilot programme that opens its first European exchange-traded fund for voting choice. And in the months ahead, Vanguard is looking to expand its voting programme that launched last year, the firm has said.

Such moves might help asset managers avert some of the criticism that has come their way as shareholder voting became intertwined with battles over issues such as climate change or workplace diversity. But voting choice is not a panacea for them.

Asset managers have typically relied on voting policies developed by proxy voting agencies, in particular the dominant duo Institutional Investors Services and Glass Lewis. And now investors at the big asset managers are being given the opportunity to vote in line with a choice of one of the thematic policies developed by the agencies.

Some curious differences in voting policies might make proxy agencies and asset managers open to more scrutiny. For example, the agencies offer Catholic faith-based voting policies with very different outcomes. When it comes to voting for board directors, ISS’s Catholic policy is stricter. The policy recommended voting against board directors in the S&P 500 index a whopping 77 per cent of the time. By contrast, Glass Lewis’s Catholic policy is more merciful. It recommended objecting to less than a quarter of S&P 500 board directors.

How could ISS and Glass Lewis come to such different outcomes based on the same religious faith?

ISS has built its Catholic voting screen in part from the US bishops policies, and considers voting against directors if a company does not have 40 per cent of its board from “under-represented gender identities”. Glass Lewis’s Catholic policy has a lower requirement of 20 per cent of board directors to be women.

“These things are not binary, black-and-white approaches. It is a bit more of a spectrum of approaches,” says John Wieck, chief operating officer at Glass Lewis. “There will certainly be a fair amount of overlap. But there could be differences,” as there are between the two advisers’ benchmark voting policies. 

Such divergence is apparent elsewhere too. Shareholder advisers also offer a policy for public pension funds. The ISS pension policy supported 80 per cent of all environmental and social shareholder resolutions. But Glass Lewis’s policy supported just 40 per cent of environmental and social issues.

Asset managers have been hesitant to say which investors are using various voting policies, or which ones are most popular. Vanguard said last month nearly half of investors offered voting choices simply deferred to Vanguard’s voting policy as usual. BlackRock says investors holding less than a quarter of the $2.6tn of assets available for voting choice have taken advantage of the programme.

Still, voting choice should prompt companies to think differently about their investor relations, says Georgia Stewart, chief executive at Tumelo, a provider of shareholder voting technology, Historically, companies simply needed to communicate with their institutional investors. But shareholder voting is starting to splinter in ways that investor relations departments have not appreciated yet, she says.

Voting choice also finally gives investors who prioritise environmental, social and governance issues a chance to take a stronger line with their votes. Some have felt frustrated that many ESG funds have shown a long reluctance to support environmental and social shareholder proposals in votes. Companies might now face more support for such resolutions.

“We are heading to an era where the end investors’ choice is king,” says Lindsey Stewart, director of stewardship research at Morningstar. Still, voting choice is unlikely to end the political problems for asset managers, ISS and Glass Lewis. Stewart adds: “A lot of political individuals and groups have these organisations in their crosshairs and I don’t think they are going to let go anytime soon.”

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