Do you think Elon Musk should be paid $47 billion to keep his attention focused on Tesla? Or that Disney has gone “woke?” Or that Shell isn’t moving away from oil fast enough?
If, like many people, you own these companies through mutual or exchange-traded funds—say, as part of your 401(k)—you don’t get a say in these matters; only your fund manager does. But get your suffragist hat on, because this could soon change as big investment firms embrace “pass-through voting.” That is, giving their clients a voice during “proxy season”—the spring period when listed corporations hold their annual general meetings.
Since 2022, BlackRock, the world’s largest asset manager, has rolled out pass-through voting for some institutional clients in its equity tracker funds. This season, the experiment has been extended to the three million U.S. retail shareholders of the company’s mammoth iShares Core S&P 500 ETF. So far, the owners of $600 billion worth of assets have opted in. Vanguard and State Street Global Advisors have similar projects with an increasing number of funds.
Of course, big clients with separate accounts at asset-management firms already had the ability to vote. As did individual investors, even if they owned single stocks through trading platforms. eToro said last week that votes had been cast on an unprecedented 24% of the Tesla shares owned by its users, with 80% backing Musk’s pay package.
Still, most people stash their savings in passive funds that track hundreds of companies. Wading through all the relevant 100-page proxy statements to vote on mostly mundane resolutions would be unbearable. This is why the pass-through voting systems unveiled by the big index-fund managers include a limited menu of options for retail investors, such as following recommendations from proxy advisory firms ISS and Glass Lewis. This week, both have urged shareholders to vote against Musk’s pay.
Funds are getting serious about pass-through voting because of digital technology, which is fueling a trend toward customization and helping cut through a messy, old-school proxy system.
It isn’t straightforward to ascertain who owns what to grant them the appropriate voting rights, especially when many investors own funds through brokerage or wealth platforms. Financial technology firms, most prominently Broadridge, can solve this problem by liaising with all involved parties.
Yet pass-through voting may also be gaining favor because strategies focused on environmental, social and corporate-governance issues are losing it.
In 2021, when ESG was in its heyday, BlackRock CEO Larry Fink told his shareholders that his firm’s fund managers would influence company boards to promote racial and social justice. Three years later, Fink has come under fire in an “anti-ESG” backlash. Consumer products including beer, apparel and electric cars have become increasingly politicized.
BlackRock and most of its peers have always maintained that ESG is about extracting greater financial value, not politics. But drawing the line is hard. Take oil giant Shell: Ahead of its annual meeting last week, big investment managers such as Amundi filed a resolution pushing for greater alignment with Paris climate agreement targets, which ended up receiving a respectable 19% of the vote despite executives’ opposition. Such a move may well have met ethical goals and reduced risks of regulatory backlash, but enough to justify pumping less crude at $80 a barrel? Perhaps not.
The underlying problem is that green-minded pension holders in Scandinavia and evangelical 401(k) savers in Alabama have very different values.
For top ETF providers that rely on mass appeal, such as BlackRock, Vanguard and State Street, it seems smart to pass these political footballs to their clients. The Republican-backed Index Act of 2022 was a warning that lawmakers could eventually force them to do so. This also defuses some antitrust concerns about index funds owning most corporations in the developed world.
Today’s pass-through voting stops short of granting a voice on specific agenda items such as the compensation of Tesla’s boss. Introducing single-issue votes is technologically complex and could raise legal questions if investors knowingly vote against a company’s interests.
But that could change thanks to startups such as Tumelo, originally founded by Cambridge University students to allow for greater control over the university’s endowment fund.
London-based Legal & General Investment Management has started to use Tumelo’s technology to offer its clients, the Camden Pension Fund and the Superannuation Arrangements of the University of London, the possibility of voting across all of its pooled investments based on the recommendations of PIRC, a voting-policy provider they have selected. Crucially, both can override PIRC and directly vote on key issues. LGIM’s stewardship team makes the decision if neither PIRC nor the ultimate investors take a view—or in the rare cases when it believes the choices go against its fiduciary duty.
Although not yet used by individual investors, the technology is ready for it, Tumelo CEO and co-founder Georgia Stewart said.
This could be a glimpse into the future. ETF holders may soon be able to choose from an extensive menu of proxy-voting policies tailored to their political preferences, and then cast specific votes on the issues they strongly care about. Generative artificial intelligence could dramatically lower the cost of designing policies that appeal to different groups.
The big question is how this would change corporate governance. So far, Broadridge data suggests that individual investors are less favorable to environmental and social proposals than fund managers. The latter also tend to side with executives, who currently get their way in roughly 90% of resolutions. Indeed, “always agree with management” is among the few pass-through options allowed by today’s index providers.
As with real democracy, shareholder democracy may bring with it more flashy campaigns—and the odd big upset.
Appeared in the June 3, 2024, print edition as 'More 401(k) Owners May Soon Vote on Issues Like Musk Pay'.