- For years, investors have been battling erosion of their voting rights, such as asset managers refusing to consider voting wishes of asset owners.
- Asset managers, most recently State Street Global Advisors, want to allow for voting options in pooled funds, and companies are introducing time-limited dual-class shares.
- Right-leaning US politicians are pushing for changes to counter a perceived liberal agenda with shareholder voting.
As a shareholder, the right to vote your shares in corporate elections has been a long-running battle for investors. This fight is heating up with UK and US asset owners flexing their muscles in order to break the governance deadlock.
In December, US asset manager State Street Global Advisors (SSGA) announced it will allow some institutional investors to direct how their shares are voted in pooled funds from 2023.
Maria Nazarova-Doyle, head of pension investments and responsible investment at British life insurance and pensions provider Scottish Widows, tells Capital Monitor the decision signals “an inevitable shift away from full asset manager control over voting to asset owner primacy when it comes to these important decisions.”
But this move follows years of intransigence from the fund management industry, outlined candidly in Capital Monitor in September of last year by Nazarova-Doyle who sat on the UK’s government-backed Taskforce on Pension Scheme Voting Implementation (TPSVI).
Their efforts to get asset managers to implement, or at least consider the voting preferences of their asset owner clients is steadily bearing fruit. The UK’s Financial Conduct Authority (FCA) is setting up a Vote Reporting Group, based on recommendations from the TPSVI, that will lead efforts to create a disclosure regime for asset managers covering their voting activity at the fund or mandate level. Details on the group are still to be announced.
And there is the launch of the Investor Coalition for Equal Votes (ICEV), involving a coalition of UK and US asset owners including New York City Comptroller’s Office, New York State Common Retirement Fund, retirement fund for the British rail industry Railpen, and the Washington State Investment Board, who collectively manage assets of over $1trn.
Ownership gerrymandering
Their focus is on dual-class shares that typically grant enhanced voting rights to founders or early investors of companies than common stock issued at public offerings. Proponents of the structure say it allows companies, at early stages of growth, to not worry about pressure from shareholder activists or takeover attempts.
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But Meta, formerly Facebook, is a great example of why such structures are problematic for shareholders of mature companies. As CEO Mark Zuckerberg effectively controls more than 57% of votes, through holding 13.6% of class B shares, worth ten votes each, he can only be removed as chief executive if he votes himself out. Investors are left with little clout, bar divestment, to challenge him on the company’s protracted share price dive, blamed on Zuckerberg’s billion spending spree on the mysterious metaverse.
According to a UK-based asset owner, this amounts to “gerrymandering” of voting rights for investors that wouldn’t be accepted in a political democracy, so shouldn’t be accepted in a corporate setting either.
Caroline Escott, senior investment manager at Railpen, who chairs ICEV, describes voting as a vital tool for investors to influence a company to act in the interests of shareholders. Dual-class share structures, she says, dampens this, pointing to evidence showing that in the medium and long-term dual-class shares can be detrimental to returns.
Academic research is divided on the merits of dual-class shares. Some find lower stock returns for dual class firms compared to single-class firms. MSCI research in 2018 found unequal voting stock outperformed the market in aggregate from 2007 to 2017 (though in contrast to competitors it allows dual-class shares in it indices – more below)
Sunset clauses
Railpen has launched ICEV with US-based non-profit the Council of Institutional Investors (CII) who has created draft legislation for the US that would require national stock exchanges to bar listings of new dual-class companies unless they have seven-year sunset provisions, or if each class, voting separately, approves the unequal structure within seven years of the IPO.
“The idea here is to give managers and boards a little bit of space as a young public company to grow the business and have a little more cover in terms of accountability. But, in a reasonable period of time, there should be revision to the one share, one vote model for us. We have to draw a line somewhere for what is reasonable and that for us is no longer than seven years after IPO,” says Glenn Davis, deputy director at CII.
Davis says that it will be engaging companies pre-IPO on introducing these provisions, as well as policy-makers and index providers.
Policy-wise, regulators are moving to encourage dual-class shares. The European Commission’s Listing Act proposes that issuers can adopt multiple voting right structures, such as dual-class shares. Last year, the UK’s FCA confirmed changes to its listing rules to allow dual class shares to be admitted to premium listings to encourage innovative companies onto public markets sooner and broaden the listed market for investors.
Escott, however, says the FCA has said that such dual-class structures will have a mandatory sunset clause of five years or less. ICEV supported this proposal during consultation on the changes, and CII is encouraging the European Commission to make a similar move with the Listings Act.
In contrast, index providers, in recent years, have sought to prevent companies with unequal voting entering their indices as a result of pressure from investors. It started in 2017, after then-popular social media site Snap controversially went public, with shares essentially giving investors no voting rights as the founders held shares giving them 90% voting power.
Shortly after, S&P excluded new companies without equal voting rights from the S&P 500 and other indices and FTSE Russell announced it will require companies to offer shareholders at least 5% voting rights. MSCI retains such companies in its global indices.
Meanwhile, the UK drive to encourage asset managers to let clients vote their shares, or share their opinions on voting, is progressing. Along with SSGA’s announcement, since the setup of the TPVSI in 2020, asset managers DWS and BlackRock have introduced options for institutional investors to vote their shares in pooled funds.
And in October Legal & General announced that pension scheme trustees would receive a new service where they can express their views and trustee policies on upcoming AGM votes
Scottish Widows has a similar relationship with its pension scheme trustee clients, where the stewardship team regularly quizzes them on their views to feed into its stewardship policy, explains Nazarova-Doyle.
Asset manager-owner alignment increasing
Nazarova-Doyle says the TPVSI and its recommendations were designed to advocate for change in the asset management industry to make sure there’s more alignment between asset managers and asset owners. “There are instances where asset owners have clear ideas and wishes but then asset managers either don’t know about them or do nothing about them,” she says.
She adds that at a minimum every pension trustee should understand how their asset managers approach voting and compare it to their policy position.
The taskforce’s flagship report blamed all sides of the market for lacklustre effort on voting. It found relatively few UK asset owners have formal voting policies (31%) and many fund houses offered very poor client service on voting.
In June, its last act was to survey asset managers on voting implementation. But out of 44, 13 (35%) were not open to forward looking discussions with clients on voting suggesting the industry still has a way to go on the issue.
Pressure looks set to remain, however. Nazarova-Doyle says State Street’s move “confirms the trend of empowering asset owners to have a more active role when it comes to voting on their investments”. Voting, she says, is one of the most important tools for stewards of capital which when used well can have the power to make businesses more sustainable and responsible, improving value for investors and beneficiaries.
However, the drive to use voting rights to drive sustainable, responsible and valuable businesses has created strange bedfellows coming from the US anti-ESG wave with Republican politicians pushing for retail investors to be able vote their shares to counter the “liberal political agenda” of BlackRock, SSGA and Vanguard, who are increasingly voting their shares on ESG issues.
On 3 November, Vanguard, who recently exited the Net-Zero Asset Managers initiative following Republican pressure, launched a pilot scheme where US retail investors can decide how their votes are cast. With BlackRock planning similar moves this year too, the march of change on voting, whatever the intentions, looks inevitable.
