Voting and engagement: the two pillars of stewardship
Written by Will Goodwin, co-founder, Tumelo.
The role of stewardship today focuses on two major components: engagement and voting. Both are used regularly by investors to steward companies towards acting in line with their desires for the business — whether this be for financial, strategic, ethical or political reasons.
This blog explores both methods, explaining and evaluating their role within today's stewardship practices.
Engagement: an overview
Engagement is where investors (often fund managers) hold a dialogue with investee companies and ask them to change or do something differently.
How does it work?
This type of stewardship action takes many forms. Companies will often reach out and survey investor opinion through regular shareholder engagement programmes, or arrange meetings with their largest investors to discuss investor views.
Sometimes investors with a particular agenda - often referred to as activist investors - will seek out meetings with the company's management to petition for change.
Driven by a "select few"
It’s worth noting that this type of stewardship is often something only large, direct investors in the company can do effectively, as their large stake in the company gives them more influence.
In addition, consultation on the engagement that happens between fund managers and the investee companies is often limited to large investors, and even then, very few fund managers have the capability to involve investors in the voting process, but this is beginning to change.
Voting: an overlooked tool
Voting is where investors in a company actively vote on proposals presented at company shareholder meetings.
AGM proposals are submitted by the company Board and shareholders, and as a result, resolutions cover many issues including director elections, “say on pay”, environmental policies, human rights, gender equality, etc.
Below are examples of proposals that were voted on during the 2022 AGM season:
Governance: A Tesla proposal to elect two Class III directors to serve for a term of three years, subject to the approval of Proposal Two, or until their respective successors are duly elected and qualified.
Environment: Amazon – Item 7 – shareholder proposal requesting a report on packaging materials.
Climate: Exxon Mobil shareholder proposal – Item 8 – Report on Scenario Analysis.
Say on pay: Walmart – Proposal 2 – Advisory Vote to Approve Named Executive Officer Compensation.
Health: Coca-Cola – Item 4 – Shareowner Proposal Regarding an External Public Health Impact Disclosure.
How does voting work in practice?
Today, voting is carried out entirely by the fund manager. Either the individual portfolio manager is voting the shares in their fund, or a centralised stewardship team is making voting decisions for the fund manager as a house – voting all the shares in a single direction. In almost all cases and at almost all firms, the fund manager relies on a proxy advisor to help them decide how to vote.
Proxy advisors produce voting policies, a set of rules that determine the recommendations for ballots. Template vote policies are available based on different broad-based investment strategies, or a fund manager can create a custom policy that is tailored to their specific strategy. Quantitatively, most voting decisions are made in accordance with the policies of the proxy advisor.
However, “significant votes” go through a more considered process whereby the fund manager will take in multiple data points (including their engagements – private discussions – with said company over time) to decide how to vote. Historically, this has been the most cost-efficient way for a fund manager to fulfil their obligations.
Why pass-through voting has arrived?
However, as the voting influence of fund managers has grown alongside the assets of the funds they manage, and pressure increases on their clients to take more control of stewardship, the current system has come under increased scrutiny.
In anticipation of this scrutiny, the three largest fund managers in the world have announced “pass-through voting” initiatives.
These initiatives, some launching February 2023, are rewiring the voting system so that beneficial owners of shares can instruct votes in proportion to the amount of the fund they own.
Tumelo has written a white paper which can bring you up to speed on pass-through voting as it stands in the industry today. It contains information on the market and regulatory background of this new service, as well as an analysis of the benefits and challenges it presents to the industry. You can download it here.
Engagement vs. voting - which is best?
Ultimately, for an investor looking to steward their investee companies to the best possible standard, using both of these methods in tandem would be ideal.
However, while a mixture of these two approaches can be possible, both have challenges to implementation for different reasons. Productive engagement with a company still remains a privileged activity of large investors, and while voting is accessible to all investors, it is not often possible for the underlying asset owner to have a say on how their shares are being voted.
Technological innovations such as pass-through voting and expression of wish could forge a future for stewardship in which both of these methods combine in a complementary fashion, with more data on investor voting preferences to support engagement efforts, and more involvement of asset owners in the voting process.