Pass-through voting is emerging as an important feature of the investor stewardship ecosystem following the recent introduction of voting choice programmes by major US index managers. By enabling fund investors (asset owners) to strengthen control over shareholder voting decisions traditionally delegated to asset managers, pass-through voting enhances alignment between voting outcomes and the stewardship views and preferences of asset owners. While promising profound changes to corporate governance and stewardship practices, pass-through voting has generated mixed responses. Key concerns expressed by some asset managers and issuers include reduced complementarities between ownership, voting, and engagement; poorly informed voting; increased complexity in communications with investors; and, most substantially, greater reliance on the voting recommendations of proxy advisory firms, which has already generated much debate even in the absence of pass-through voting.
Pass-through voting has long been considered and practiced in the United Kingdom, with some UK asset managers offering it to select institutional clients, albeit without much publicity. This makes UK practices an excellent lens through which to examine the implications of the growing importance of pass-through voting. Additionally, understanding institutional investor motivations in adopting pass-through voting gives insight on attitudes to developments like mirror voting. We develop a structured framework and use evidence from interviews with key participants in the UK institutional market to assess the implications of pass-through voting for shareholder stewardship. The picture that emerges is nuanced, showing that while pass-through voting creates risks for stewardship, it can also be beneficial. Benefits are most likely to arise under three conditions: when asset managers have a client base with strongly divergent preferences on stewardship topics; when stewardship, including the integration of voting and engagement, are not central to the asset manager’s investment proposition, leading to low costs of separating voting and engagement; and when the practice is adopted by asset owners selectively and responsibly, with appropriate oversight.
