What is client-directed voting?

Author: Iskandar Suhaimi, Content writer, Tumelo

Client-directed voting continues to divide opinion as some argue that it boosts investor democracy while others predict it to hinder effective engagement.

This blog will shed some light on what client-directed voting is, and why the industry is talking about it.

What is client-directed voting?

Client-directed voting is an umbrella term for when an investor participates in proxy voting, where previously the voting was done only by an asset manager.

While simple in theory, the investment system currently positions investors — both retail and institutional — to be heavily reliant on asset managers. This makes voting difficult, and often times impossible, for many investors.

There are currently two main solutions that fall under client-directed voting: pass-through voting and expression of wish.

*Other associated terms include direct voting, split voting and voting choice.

Client-directed voting options

Pass-through voting
Pass-through voting allows an investor in a pooled fund to vote the shares of underlying companies in proportion to the AUM they have invested in the fund.

It can be used by both institutional investors (such as pension funds and endowments) as well as retail investors (like those invested in ETFs or an index fund) in pooled funds.

Expression of wish
Expression of wish allows investors to send voting preferences for the AGM resolutions of companies in which their pooled fund is invested. This could be a pension member sending an expression of wish to their trustee, or a pension fund sending an expression of wish to its appointed manager.

Where did it come from?

The phrase "client-directed voting" was coined by Stephen Norman, a former corporate secretary at American Express, in 2006.

It was first intended as a solution for allowing retail shareholders to participate in proxy voting. However, apart from a brief period of interest in the subject during the late 2000s — owing to the US Securities and Exchange Commission (SEC) — client-directed voting gained limited traction.

Two things in 2020 re-ignited the industry's interest in client-directed voting: i) the UK Stewardship Code; and ii) BlackRock's Voting Choice.

While neither used the term "client-directed voting", both allowed/encouraged investors to participate in proxy voting. The ball kept rolling from that point.

Now, pass-through voting and expression of wish are offered by the largest asset managers, including Vanguard, State Street, and Legal & General Investment Management.

Why does it matter?

Recent research highlights that asset owners' and managers' voting preferences can be misaligned, especially on shareholder resolutions; echoing Tumelo's past findings. This threatens to weaken asset owners' stewardship impact, leading some asset owners to consider how their voting activities align with their engagement efforts.

Further, recent regulatory movement, like the INDEX Act in the US and the UNPRI's report on beneficiary preferences, is encouraging increased representation of investor preferences. The message is particularly strong in the UK with the Department for Work & Pensions' Taskforce on Pension Scheme Voting Implementation and the Vote Reporting Group's consultation paper.

Then there is demand. Asset owners have cited various motivations for wanting client-directed voting solutions, including: i) addressing systemic risks through voting; ii) enabling better conversations with asset managers; and iii) simply being able to better represent beneficiaries' views.

Which is better — pass-through voting or expression of wish? This is a topic of debate within the industry right now and was at the centre of Tumelo's recent roundtable of stewardship experts.

While the verdict is still out, at Tumelo we believe that client-directed voting needs to be the future.

Conclusion

In an ideal world, a couple of conversations would be enough to fully align asset owners with their managers.

But in reality, more is needed to bridge the different priorities of both parties. Given the momentum propelling client-directed voting forward, it is becoming harder for asset owners and managers to be indifferent about it.

Client-directed voting has the potential to improve alignment between asset owners and managers, encouraging more effective stewardship. The unknowns that come with this new technology should not deter the industry from engaging with it.

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Client-directed voting is fast appearing on asset managers' agendas. Find out seven industry leaders' views on client-directed voting in Tumelo's latest discussion paper.

References

[1] For more on information on pass-through voting, read Tumelo's white paper.

[2] Read about the history of voting rights in this paper by Prof. Sarah Haan.

[3] Prof. Jill Fisch offers an insightful comparison of the merits of pass-through voting and expression of wish. Read her research.

[4] Prof. Caleb Griffin approaches pass-through voting with an index-fund focus.

[5] Read about MoxyVote, a client-directed-voting pioneer back in 2010.