Technology Advances Facilitate Pass-Through Voting

Elizabeth Kantrowitz is Head of Client Success for Investor Solutions, and Meghan Orifici is Regional Head of Client Success at Institutional Shareholder Services, Inc. This post was prepared for the Forum by Ms. Kantrowitz and Ms. Orifici.

As a growing number of investment managers commit to investment stewardship initiatives to facilitate greater shareholder democracy, these fund complexes require a solution that will allow underlying clients, most notably asset owners, to direct their votes in a manner they choose.

Historically, several market impediments, including technological limitations, cost prohibitions, and, most importantly, infrastructure constraints, hindered the ability of investment managers to provide for so-called “pass-through” voting. Chief among these impediments was the inability to de-aggregate positions from a pooled vehicle, either by the underlying shareholder or common vote policy selection. Pooled vehicles offer a cost-effective solution for asset owners; however and historically, this meant vote authority remained with the investment manager. To address this, our firm, Institutional Shareholder Services (ISS), built an engine allowing for a range of options to provide underlying investors the opportunity to participate in the voting process. By partnering with investment managers, ISS is able to streamline the de-aggregation process and easily identify the portions of each pooled vehicle that are selecting to engage and utilize a separate vote policy and recommendation. Second, the concept of split-voting has been around for years, but in practice is cumbersome and tedious and so any large-scale solution would require significant automation. The solution, dubbed ISS Vote Preference, provides a range of options, from one time policy selection that automatically applies to the investor’s proportion of the fund’s holdings, to full access to proxies by underlying asset owners for ad hoc voting. Underlying vote preferences are automatically aggregated by the ISS Vote Preference engine thus allowing for scalability and applied to the ballot for processing in the market. Meanwhile, the remaining portion of the fund continues to be voted under the investment manager’s standard operating procedures, thereby ensuring those investors not interested in participating in the pass-through voting process continue to benefit from the manager’s stewardship program.

Providers must also tackle tracking markets and issuers that allow for split voting and mitigate risks related to the re-aggregation of votes and share positions. ISS’ proxy voting platform, ProxyExchange (PX), tracks and flags meetings where split votes are not accepted in the local market and these ballots are automatically removed from the ISS Vote Preference process. Investors may also select other scenarios in which they will include or exclude ballots from this solution.

Voting, however, is just one piece of the overall pass-through voting process. Various stakeholder and regulatory requirements require nimble reporting capabilities. This includes the ability to provide reporting to individual investors as well as regulatory bodies such as the U.S. Securities and Exchange Commission (SEC). Investment managers need to be able to identify individual investor holdings data and provide comprehensive security and voting details in an easy to digest format both quickly and accurately. The ISS Vote Preference solution allows investment managers to efficiently document and disclose individual investor votes, while at the same time compiling the vote data in formats appropriate for regulatory reporting, such as the annual N-PX for institutions subject to SEC oversight.

By way of example, and something we see growing in prevalence, are instances of U.S. managers now rolling out a large-scale offering, affording their underlying clients the ability to reflect their perspectives on corporate governance and environmental and social issues through proxy voting. Clients who opt into the program can choose from a variety of voting policies and perspectives, as selected by the asset manager. Vote recommendations from the chosen policy can be automatically applied to the clients’ portion of the fund, or individual clients can actively participate in the voting process, reviewing key agenda items, or items of particular interest, and selecting their vote. The manager can customize the offering based on the level of participation they want to provide to their underlying clients.

Internationally, asset owners are more engaged than ever and seek to convey their unique worldview on a range of corporate ballot items. For instance, a U.K. asset manager, with underlying pension clients in pooled accounts who have requested their shares be voted in alignment with their own proprietary policy recommendations, can be accommodated through the ISS Vote Preference solution. An underlying pension client’s shares can be segregated from the pool and voted according to any number of policies, while the remaining portion of the pool is voted according to the U.K. asset manager’s house policy. The process is fully automated, auditable, and the fund manager can easily provide reporting to their pension clients as needed.

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